The Federal Reserve Board recently issued a Service Announcement setting forth the details of its FedNow Service, a new 24x7x365 interbank settlement service with clearing functionality to support instant payments in the United States.
The Fed announced its decision to develop the FedNow Service in a notice and request for comment issued in August 2019. In the Service Announcement, the Fed states that based on additional analysis informed by the comments it received in response to the 2019 notice, it has approved the FedNow Service as described in the Announcement. The Fed indicates that it intends to launch the FedNow Service “as soon as practicably possible.” Although the Fed’s target release date is in 2023 or 2024, it plans to announce a specific time frame for launch, as well as earlier pilot programs, through established Fed channels once additional work is completed.
The first release of the FedNow Service will provide baseline functionality to support market needs and help banks transition to a 24x7x365 service. It will also offer optional features, such as fraud prevention tools, the ability to join initially as a receive-only participant, request for payment capability, and tools to support participants in handling payment inquiries, reconcilements and certain exceptions. Other aspects of the service, such as fee structures and governing terms, will be announced prior to the launch of the service through established Fed communication channels. The Fed plans to take a phased approach to providing additional features and service enhancements over time based on ongoing stakeholder engagement.
The Announcement contains the following general description of the FedNow Service:
- 24x7x365 functionality
- Credit functionality only
- Support for domestic instant payments only
- Availability limited to institutions eligible to hold accounts at Reserve Banks (ineligible entities may be able to act as service providers or agents for participants)
- Settlement of payments in master accounts held at Reserve Banks
- Interbank settlement for transactions to be final
- A participating bank must agree to make funds associated with individual payments available to its customers in near real time after receiving notification of settlement
- A participating bank can designate a service provider or agent to submit or receive payment instructions to and from the FedNow Service on its behalf and can choose to settle payments in the master account of a correspondent bank
- A bank can enroll as a “receive-only” participant
The Announcement also includes a detailed description of the following core features of the FedNow Service:
- Payment flow and message types
- Message standard
- Transaction value limits
- Business day
- Seven-day accounting
- Liquidity and credit
- Liquidity management tool
- Network access
- Request for payment
- Fraud prevention tools
In addition, the Announcement describes the following features that the Fed may introduce over time:
- Support for alias-based payments
- Application programming interfaces
Other issues discussed in the Announcement include the FedNow Service’s interoperability with the existing private-sector instant payment service, cost recovery for the FedNow Service, and service fees. With regard to fees, the Fed states that based on prevailing market practices, it expects the fee structure to include a combination of per-item fees, charged to the sender’s bank and potentially to the receiver’s bank, and fixed participation fees, with the ultimate fee structure and schedule to be informed by the Fed’s assessment of market practices at the time of implementation.
The last item in the Announcement is the Fed’s competitive impact analysis which looks at whether any differences between the FedNow Service and similar private-sector services could create a direct and material adverse effect on the ability of the private-sector services to compete effectively with the Fed. The Fed concluded that none of the differences identified would create such a direct or material adverse effect.