FedNow set to modernize nation's payment system

ARTICLE | August 03, 2023

Authored by RSM US LLP

On July 20, the Federal Reserve launched its FedNow Service, a new system for instant payments. The system allows participating financial institutions, regardless of size, to send and receive payments instantly, 24 hours a day, seven days a week, 365 days a year.

With this launch, a simplified, faster payment rail is available to nearly every financial institution in the country and those that offer it will have a significant advantage over institutions that delay. A new system for instant payments is especially crucial considering the rise of fintech adoption in recent years; 88% of U.S. consumers used fintech in 2021, up from 58% in 2020, according to a Plaid annual report.

In addition to real-time settlement, FedNow is expected to offer several benefits to both businesses and consumers seeking better options for managing their finances. Over time, FedNow will offer the ability to accept payments from customers and suppliers and improve cashflow management, bill payment, purchases, and money transfers.

The service is part of a broader initiative to modernize the nation’s payment system. The real-time payment network (RTP), currently operated by the nationwide automated clearinghouse system, has been available for over five years but serves a limited number of financial institutions. FedNow is expected to be more widely available and easier to use than the RTP network and allow participating financial institutions to send and receive payments to each other directly through their established Federal Reserve relationship, eliminating the need for an additional intermediary.

Some more details about FedNow:

• The system uses the same encryption standards as the other Federal Reserve payments systems. It is designed to be highly secure with advanced features to protect against fraud and other security threats.  
• It includes a scalable infrastructure that is flexible, can handle large volumes of payments and allows for easy integration with existing systems and technology.  
• The system is only available in the United States as of now, but there are plans to expand its capabilities to support cross-border payments in the future, enabling lower transaction costs and further the reducing the need for intermediaries. 

FedNow’s success will depend on how many institutions adopt it and how quickly the service is deployed to customers. The system is expected to provide many potential benefits for institutions and their customers, but with those benefits comes the need to enhance internal systems and processes to reduce risk, identify fraud, and meet the 24/7 operational requirements.

As part of their planning, participating financial institutions should consider the necessary people, process and technology changes—including change management programs—they will need to make to ensure the transition is successful.  Considerations include possible changes to know-your-customer programs, enabling real-time transaction monitoring and alerts systems, and utilizing machine learning to aid in fraud detection.

Institutions navigating the path to using FedNow have a number of readiness, implementation and delivery factors to consider, including:

• Assessing the needs and use cases specific to accountholders and aligned to the institution’s business priorities
• Identifying opportunities to leverage real-time funds movement to manage liquidity and internal transfers
• Executing a custom delivery plan that coordinates every phase of the project, from evaluation to readiness testing to launch

Partnering with a trusted resource to guide you through the planning and implementation process is critical when launching a new service. A third-party advisor can help your institution navigate this path. Contact RSM’s team for more information.