The Federal Reserve launched its new real-time payments service, FedNow®, on July 20, 2023. This new instant payment rail settles consumer and business transactions through financial institutions’ Federal Reserve accounts. One stated goal of FedNow® since its earliest planning stages is to make instant payments ubiquitous—accessible to everyone, everywhere in the United States. The Federal Reserve has made a concerted effort to include smaller financial institutions in FedNow® to reach this goal.
FedNow® payments are required to settle in real time or within seconds. Settlement must occur 24/7/365, which would be prohibitive for financial institutions that do not have the ability to settle transactions around the clock. To address this issue, financial institutions can use a correspondent bank or credit union as an intermediary to process the transactions. Service providers also have stepped in to enable financial institutions to participate in the FedNow® service. At launch, 35 financial institution participants, including settlement agents and liquidity providers, the U.S. Treasury Bureau of the Fiscal Service, and 16 service providers were live on the FedNow® network. Service providers for FedNow® include some of the largest card payment processors in the U.S.
The use cases for FedNow® include all combinations of consumer and business payment transactions, including peer to peer (P2P), account to account (A2A), business to business (B2B), consumer to business (C2B), and business to consumer (B2C). Government and municipal payments are also expected through FedNow®, evidenced by the inclusion of the U.S. Treasury Bureau of the Fiscal Service as an active participant. Payments are irrevocable, posing challenges for managing the risk of unauthorized transactions. Fraud tools specific to FedNow® have been developed to help prevent, detect, and mitigate fraud. For example, a “Negative List” will help FedNow® participant financial institutions and service providers identify and block fraudulent actors. Transaction limits at the network and financial institution level are also primary fraud tools for FedNow®.
FedNow® transactions and participants will be subject to the new Subpart C to Regulation J (12 CFR Part 210), which incorporates the provisions of UCC Article 4A. The applicable UCC Article 4A is provided in Appendix A to the regulation. Regulation J provides that the Electronic Fund Transfer Act (EFTA) may also apply to a FedNow® transaction, and in the event of an inconsistency between the EFTA and Regulation J, the EFTA will prevail. In addition, the Federal Reserve has issued Operating Circular 8 for the FedNow® service to govern all participants.
Information about FedNow® is available at FedNowExplorer.org.
