Consumers and businesses stand to benefit from rapid access to funds at any time when routed through participating financial institutions.

On July 20, 2023, the Federal Reserve announced the long-awaited launch of its real-time payment service, FedNow. The new service enables consumers and businesses to send and receive payments instantly on a 24/7/365 basis via participating financial institutions. It is available to financial institutions eligible to hold accounts at Federal Reserve Banks, and participating depository institutions may appoint a service provider or agent to submit FedNow payment instructions on their behalf. FedNow will initially only support domestic payments between US depository institutions.

FedNow can benefit consumers, businesses, and financial institutions with the promise of more flexibility and transparency of payments, improved cash flow and money management, and new customer service solutions.

Some of the use cases envisioned for FedNow include:

• Person-to-person (P2P) payments
• Account-to-account (A2A) payments
• Consumer-to-business (C2B) payments
• Business-to-consumer (B2C) payments
• Business-to-business (B2B) payments
• Payments to/from government (for consumers and businesses)

To facilitate real-time payments, FedNow processes payments on a transaction-by-transaction basis, meaning that financial institutions will be able to instantly debit and credit customer accounts. This design is faster than existing payment services that process transactions in batches, such as Automated Clearing House (ACH). However, the speed and finality of FedNow payments requires that financial institutions and their fintech service providers assess, and adjust as needed, their practices for these FedNow features. Financial institutions and fintech service providers should therefore consider how FedNow may impact:

• Customer preferences and expectations
• Product and technology infrastructure
• Fraud prevention and detection
• Compliance policies and procedures
• Treasury management and reporting
• Liquidity risk and credit risk
• Other aspects of the business that impact or are impacted by real-time payments

Building the Network

The Federal Reserve announced that over 50 early adopter organizations (including depository institutions and fintech service providers) have completed FedNow certification and now support instant payments. The Federal Reserve will continue providing certifications to financial institutions and service providers for participation in FedNow, as growing the network is key to increasing availability of instant payments throughout the US.

Competitive Services

FedNow will compete with a private sector instant payment and settlement service, Real Time Payments (RTP). The Clearing House, a payments company owned by the largest US banks, launched RTP in 2017 to enable participating financial institutions to provide real-time payments to their customers. A primary differentiator between FedNow and RTP is that FedNow will service all depository institutions eligible to hold accounts at Federal Reserve Banks — over 9,000 financial institutions. This level of potential scale provides opportunity for widespread adoption across the US, something that has not been realized to date with RTP. Time will tell how much FedNow represents competition — or opportunity — for market participants innovating in the payments space.

Fees

To encourage increased adoption of FedNow, the Federal Reserve will waive the monthly participation fee in 2023 and will discount the $0.045 credit transfer fee on the first 2,500 customer credit transfers per month. Initially, FedNow will have a default credit transfer limit of $100,000, but financial institutions may increase or decrease their credit transfer limit up to $500,000.

The latest fee schedule that the Federal Reserve announced includes:

• $0.045 fee per credit transfer (and return), to be paid by the sender
• $0.01 fee per request for payment (RFP) message, to be paid by the requestor
• $1 fee per liquidity management transfer, to be paid by the sender
• $25 monthly participation fee, to be paid by the financial institution

Concerns

Despite the buzz around the launch of FedNow, the service is not without criticism, primarily regarding lack of protections against consumer fraud. The Federal Reserve has touted the anti-fraud tools built into FedNow and plans to offer more features and enhancements to FedNow to support safety, resiliency, and innovation, but the system’s safety will become clearer with time.

Financial institutions and fintech service providers should be aware that the Electronic Funds Transfer Act (EFTA) will apply to FedNow transactions, as with existing electronic fund transfers via ACH. However, the Federal Reserve has encouraged suggestions for strengthening consumer protections in the area of instant payments. Financial institutions and fintech service providers should stay abreast of changes to FedNow, as well as market developments with respect to use cases and fraudulent activity.

Latham & Watkins will continue to monitor developments in this area.