On February 2, 2021, the Federal Reserve (“Fed”) announced that the launch date for its instant payments platform—FedNow—would be sooner than originally expected. The announcement narrows the delivery timeframe by a full year.
FedNow provides interbank clearing and settlement, which enables funds to be transferred between banks and credited to accounts in near real-time. The Fed’s move-up of the anticipated launch date appears to be prompted by criticism that the U.S. is lagging behind other countries with respect to instant payments platforms. It is expected that FedNow will be particularly appealing to smaller and mid-sized financial institutions that need an entre-point to instant payments platforms.
FedNow’s initial launch will include core clearing and settlement functionality and key value-added features, such as a request-for-payment capability and tools to support participants in their handling of payment inquiries, reconcilements and certain exceptions. The Fed plans to supplement FedNow’s core functionality in subsequent releases.
Before FedNow is released, it will be extensively tested to ensure that it is market-ready. In the first quarter of this year, the Fed plans to finalize FedNow’s ISO specifications, an international standard for payments messaging. The Fed is also considering adding cross-border payment capabilities after the initial launch.
The latest announcement is significant because of its focus on interoperability. The ISO specifications are an important tool for financial institutions, processors, and others to understand how to interface and send messages on the system. The Fed is also working to integrate FedNow with the RTP Network offered by The Clearinghouse so that the two systems can effectively operate alongside one another.
According to Kenneth Montgomery, first vice president and chief operating officer at the Federal Reserve Bank of Boston, the Fed does not yet have an estimate for the ultimate cost of the system. Before its launch, FedNow will also need to devise a pricing structure, which will need to ensure that the service can recover the network’s development costs.
What is our 101 take on FedNow and RTP Network? The United States is a relatively new player in the real-time payments space. The Clearing House launched the RTP Network back in November 2017 and is currently the only RTP rail servicing the United States. The Fed’s entry into the real-time payments space could mean more opportunities for participants in the U.S. payments ecosystem to allow them access to real-time payments for a variety of use cases, from real-time access to wages for gig workers to a transformation of treasury and payroll services for corporations (no more costly checks!) and increase overall certainty in payments.
For more information, see our article “Will COVID-19 Fraud Issues Impact the Use of Real-Time Payments” and podcast “An Introduction to Real-Time Payments” on the topic of real-time payments and related issues.