SPONSORED CONTENT PRESENTED BY FEDERAL RESERVE FINANCIAL SERVICES
In today’s world, individuals and businesses expect everything at the click of the button, including the ability to send and receive money. With the Federal Reserve’s FedNow Service, financial institutions can meet the growing demand for instant payment solutions and join the more than 1,200 banks and credit unions that are already on the network.
Your financial institution can leverage the FedNow Service to enable your customers or members to send and receive payments instantly, allowing them to precisely time payments, reduce the risk of late fees, improve cash flow management and increase the efficiency of corporate payments.
Instant payments can deliver benefits to your financial institutions, too. For instance, with instant payments, you can retain and attract new customers, generate new revenue streams and remain competitive in an ever-changing payments landscape.
If your financial institution is just getting started on its instant payments journey, you may be wondering where to begin. Keep reading to discover four key things to know about the FedNow Service.
1. Financial institutions can unlock a variety of innovative use cases.
The possibilities are endless when it comes to instant payments. Below are a few use cases, and examples of each, that your financial institution can build and offer — on your own or in partnership with other organizations — using the FedNow Service:
- Me-to-me transfers: An individual moves money between accounts at different financial institutions and can access that money right away.
- Consumer-to-business payments: A parent pays his child’s monthly preschool tuition shortly after his paycheck settles in his account and just before the payment is due.
- Business-to-consumer transactions: An insurance company immediately disburses a payment to a customer after a claim is processed.
- Business-to-business payments: A restaurant owner pays her new specialty supplier for fresh local ingredients as soon as they are delivered.
- Real estate transactions: A home buyer transfers an earnest money deposit to an escrow account as soon as an offer is accepted.
- Payroll payments: A business pays its employees for the hours they work after each shift, versus waiting for a set payday.
- Brokerage transactions: A brokerage client transfers money from his primary checking to his managed brokerage account to take advantage of fast-moving market trends.
- Wallet funding/defunding: An individual instantly moves money from a digital wallet back into their bank account.
With each of these transaction types, money is transferred in seconds any time of day, any day of the year, and the end user has access to the funds immediately. For more information on use cases, visit the Use Case Arena on FedNowExplorer.org.
2. Instant payments offer revenue-generating opportunities to financial institutions.
Offering instant payments via the FedNow Service can help you meet the needs of your consumer and business customers. Your organization also can reap other benefits from instant payments. For example, transactions settle between financial institutions in seconds, so there’s no buildup of interbank obligations. Plus, instant payments provide revenue growth opportunities that can benefit your financial institution’s bottom line, including:
- A better customer experience. With instant payments, your financial institution can increase customers’ satisfaction by meeting their expectations and providing payment services that give them greater convenience, control and visibility into the payment process. This could result in lower attrition.
- Value-added benefits for business customers. Instant payments can help your business customers better manage their cash positions, reduce administrative burdens and costs, and improve efficiency. For example, immediate confirmation of funds availability or irrevocability of credit transfers enables businesses to better manage liquidity. Additionally, the request for payment (RFP) functionality of the FedNow Service has the potential to reduce administrative tasks and improve efficiency.
- Cross-selling products. When your customers experience the efficiency, ease and transparency your instant payment platforms provide, it may make them more willing to explore other services and products your organization offers, which can help you further strengthen those customer relationships.
- Instant payments operate around the clock, every day of the year. This always-on feature makes it possible for your financial institution to disburse funds instantly on weeknights and weekends, which can lead to additional loan revenue opportunities.
More information on the value instant payments can deliver to your financial institution can be found on FedNowExplorer.org.
3. Risk management capabilities are available to support your financial institution’s own efforts.
When it comes to payments – new or traditional – fighting fraud is nothing new. However, it’s important that financial institutions and others in the payments ecosystem understand the unique characteristics of instant payments, such as speed and irrevocability, so they can take appropriate steps to strengthen their defenses.
When preparing for the FedNow Service, your financial institution will want to examine its own risk management approach and potentially upgrade systems and processes — perhaps with help from a third-party provider.
Due to the nature of instant payments, it’s crucial to detect and stop fraud as early as possible in the payment flow, preferably as part of the user authentication process. Additionally, it’s important that financial institutions help educate their customers on how to identify fraud attempts and protect personal data so they can be active partners in combating fraud.
The FedNow Service offers risk management capabilities to support and complement participating financial institutions’ own fraud mitigation programs, such as:
- Transaction limits are offered at both the network and participant level. The network maximum credit transfer transaction value is $500,000. FedNow participants have a default transaction limit of $100,000 set at the routing transit number (RTN) level. Your financial institution can increase or decrease the default limit so that it aligns with your risk profile and business needs, up to the network limit.
- Participant-specific negative lists provide additional validation during the processing of customer credit transfers and returns. Your financial institution can define pairs of routing transit numbers and account numbers to be included as a part of the business validation check through the FedNow Service. If a payment message fails a business validation check against a negative list enabled by either the sending or receiving FedNow participant, the Federal Reserve Banks reject the payment message.
- Correspondent net send limits enables correspondents that have an active FedNow participant profile can establish net send limits for each of their direct respondents at the respondent financial institution level, to both help protect their respondents and manage their own master account balance.
- Fraud reporting capabilities provided by the FedNow Service enable financial institutions to report fraud as soon as they have reason to suspect a payment is fraudulent, even if there are fewer details available initially, to help contain and prevent the spread of threat actors. When FedNow participants have reason to suspect a transaction is fraudulent through their own investigation, they are required to report it to the FedNow Service.
The FedNow Service’s fraud reporting feature highlights another important aspect of fraud management: industry collaboration. Instant payment fraud prevention efforts will be more effective if the payments industry does the same and works together to fight fraud.
The use of common terminology and classifications will help the industry share and better understand fraud information and trends. Financial institutions can use the FraudClassifierSM model to facilitate a common fraud language that encourages dialogue among them.
For more information about fraud risk management and instant payments, go to the Fraud Control Tower on FedNowExplorer.org.
4. There are a few key decisions to make before onboarding.
Most financial institutions are eager to onboard once they’ve decided to adopt the FedNow Service. The onboarding process pairs a digital onboarding tool with a dedicated customer service model designed to provide transparency, efficiency and support every step of the way. But before the process can begin, there are a few key decisions your financial institution will need to make ahead of time:
- How will you participate in the service? Consider which FedNow Service participation types you want to enable based on your business objectives and customer needs. Will you enable your customers to both send and receive instant payments? Would your customers benefit from the ability to send requests for payment? It’s important to identify which participation types best fit your needs before onboarding, but you also can make changes to your participation as your needs evolve.
- How will you connect to the FedNow Service? Like many features and functionality of the FedNow Service, there’s flexibility when it comes to connectivity. You may choose to connect directly via a new or existing FedLine® Solution to manage your participant profiles, or you may connect through a service provider if you plan to outsource your FedNow Service administrative activities. Alternately, you can choose a combination of both connectivity options, tailoring your connection to meet your needs.
- Where will you settle transactions? Before you can send or receive instant payments on the FedNow Service, you’ll need to identify the routing transit numbers that can send or receive messages, then decide where transactions sent to or from these RTNs will settle. Will your FedNow Service transactions settle in your own master account or that of a correspondent, such as a bankers’ bank or corporate credit union?
- Who will you work with to offer real-time solutions for your customers? The right team can help your organization get ready to post funds in real time, meet 24x7x365 availability requirements and ease the transition to seven-day accounting. Before you onboard, determine whether your current core, vendors and internal teams are equipped to support instant payments and identify any other partners that may be able to help.
No matter where you are on your instant payments journey, you can find information at FedNowExplorer.org. Or contact your Federal Reserve relationship manager with questions or to take a readiness assessment.
