FedNowSM Service Video Series
Learn How to Navigate Instant Payments.
For best results, we recommend watching the videos in order.
1. Faster Payments Basics
Learn the basics about the different payment channels, including The Clearing House Real-Time Payments (RTP®) Network and the Federal Reserve FedNowSM Service.
Faster Payments Basics
Hey everybody, I am Kevin Olson.
I am the payments professor and I’m here to present to you today faster payments basics. Now, one of the things I gotta tell you though is I’m not an attorney, I’m not an accountant, I’m not a tax professional. Again, not an attorney, not an accountant, not a tax professional. Heck, I’m not even a real professor. That’s good, good branding.
I am somebody who’s spent decades working in electronic payments. I’ve got a passion for electronic payments. But again, not an attorney, not an accountant, not a professional. And you may be wondering, has this guy got all of his screws in here tied tightly? No, I actually don’t.
I don’t have a filter. I’m gonna tell you what I think, what I feel and I’m gonna do so in the most, I call it edutainment, or fun way possible. Electronic payments should be fun. Are you ready for this?
The first thing we’re gonna do when we start looking at the basics of what are faster payments and what they are is let’s first define what are the payment channels that are available here in the US and our payment channels. We have cash. People will tell me, you know, cash is actually a faster payment. It is. You give somebody cash and instantly you’ve given them and exchanged money. We also have checks. Now, checks I can’t say are faster, even with remote deposit capture, which is a way to, you know, electronify your check and deposit it. It’s faster check processing, but I don’t know if it’s a faster payment.
We also have ACH. ACH is awesome. It’s, it’s your automated clearing house. It is a way of doing electronic payments. It was our newest payment system until, you know, a couple of ones coming up here on the list, and it works in a format of next day. And in same day. And we’re gonna talk more about that one.
In this presentation, we see the card networks. And when you mentioned card networks, cards work well in a lot of different ways. There are debit cards, there are credit cards, there are prepaid cards, there’s all kinds of cards. And on top of that we have wires.
Wires are a method for being able to send electronic payments. Now they can be done domestically, they can be done internationally. And having said that, I want you to know we’re gonna be focusing on domestic payments when we talk about faster payments. Why domestic? Because right now most of our faster payment options are domestic only. Now, I did say most, and I will touch a little bit on international things, but just so you know, we’re focusing more on what’s happening in just the US for right now.
Next, we have the RTP network, one of the newest players to the, I gotta say this one instant, real time, faster payments world. And then we have FedNow and that’s FedNow instant payments. Now you may be gone. That’s a lot of payment channels. How do they all work? What do they all do? What do I need to know about electronic payments?
What do you need to know about electronic payments? Well, there’s some questions to look at to be answered when you’re looking at and defining what is a faster payment. Now, one thing I want to tell you is I’m gonna go over different options that are here, but I highly encourage all institutions that you define for yourself what an electronic faster payment is. It could be many different things, but it’s up to you to determine what you define to be a faster payment.
Now, some of the questions I like to ask are, okay, why are we talking about all these faster payments? We’re talking about these faster payments because they’re new, they’re something that we also see is in demand. Your account holders, business and consumers, they’re using these methods for faster payments. We’re seeing around the globe adoption of faster payments in multiple countries. Over 70 countries around the world currently have faster payment mechanisms.
Okay? You hear about RTP, you hear about Zelle® and you’re probably wondering, okay, what are those? And are there any other options? Yeah, there are. And we’re gonna go over some of those. Okay, what does our client need? Well, I’m gonna say safety and security first. Of course, there is also speed. Speed is important. We feel the need for speed and payments.
Okay, what are the implications for the industry? But even more so for my financial institution? Well, these faster payments, they’re changing the world. They’re changing how things are done. They’re changing the expectations of what consumers and what businesses have. Do we really need faster payments? Yes, yes, yes, yes, yes, yes, yes, yes, yes. In fact, we’ll go over in a different session use cases which will explain and identify the many ways that faster payments can and are being used, but also help you to decide what’s the best use case for you. And you know what, what is the use case? What is the business case? How do we justify spending all this money to have all these payments? And what is our strategy?
Okay, strategy. That’s where things get to be a little bit of fun there. Now strategy is determining what, how, when, who’s gonna offer and what you’re gonna offer too. I already said that I know, but there’s a lot that goes into strategy. that’s not gonna be in this series. That’s a whole separate course. But it is available if you need to focus on strategy. But you’ll need to look at that. You also wanna look at how should we set our priorities? In fact, what’s most important to you? That really does go back to the strategy, which also would include how do we offer this by who do we partner with? And partnering with people is what makes this a lot easier.
Now those are a lot of questions, and I can’t say we’re gonna answer ’em all in this session, but I am going to say you want to be able to answer those as you’re working with faster payments and working with payments in general, faster, slower, any payments. One of the key concepts that we gotta be able to understand is, well, what is clearing now?
Clearing starts with financial institutions. It is the process that they go through to be able to move things around. It is the messages that get routed through the networks from the institutions. It is correctly processing of payment instructions. Now in the world of faster payments, these are messages that are going rather quickly. These are messages that are actually going very fast and well, we’ve gotta have agreements in place. Everything you do on electronic payments, there’s got to be an agreement.
Agreements are what help to make sure that we know that the people on both sides are, well, hopefully living up to what they’re supposed to do, but know what they’re supposed to do. And we’ll give us legal recourse if we’ve got to. The clearing and processing of these payments though is the process to be able to get money into accounts, to be able to get things over to the payees and get them credited and in faster payments. It’s, it’s done in near real time.
Now what’s also real important with clearing is knowing how settlement works. Now with settlement, I want you to know, uh, it’s a basic level here, but there are some important aspects to understand about settlement. First of all, we have real time settlement and it’s, it’s what it says. It’s when settlement happens in real time. So, when settlement happens in real time, that’s real time settlement. That’s a good thing. There’s benefits to all kinds of different settlement systems.
There’s also what we call deferred settlement. Now, deferred settlement, it actually happens at predefined, predefined terms or times deferred settlement happens at predefined times. It is at an agreed upon time. It’s usually, let’s say later in the day. Usually at the end of the day, it can be sometimes throughout the day too though deferred settlement you’ll also hear with it is um, what we call netting, which means we offset everything and what, what’s that? It’s really just a way of balancing everything out and that’s where we offset payment obligations between the participants to reduce the amount of funds that actually have to be transferred or exchanged between each party.
Instead of just doing a one-to-one, we take the group of payments and we determine based on the group, what’s the end net that has to be settled between the two parties. Now, gross settlement, that is when the settlement of the funds, usually something like security transfers occur one at a time. Now real-time settlement can actually happen one at a time too. But when we see a gross settlement system like wires for example, it’s when the settlement of the funds or the securities is happening individually on a one-by-one basis. And last, in our types of settlement, we have net settlement and we talked a little bit about netting already.
Well net settlement is where we have final settlement of transfers on a net basis. Now this is also again, you know, like our deferred. It’s gonna happen at certain times like the end of the day, but again, it can also be at different times during the day. So that’s our basics for clearing and settlement. Now it’s just understanding really what I want you to know that there is a difference between the settlement processes. That’s important when you go through to define what is a faster payment. And that’s a really good question. What is a faster payment?
Now when we go to define what a faster payment is, I’m going to go with the answer of it depends, depends upon what, it depends on how you look at it. For example, if we look at the US path to faster payments, this is a document, it’s available on the internet. You can Google, you can find it yourself. And it was where a group of experts in the US got together to help pave the way or let’s say the path to having faster payments in the US. And this was about a decade ago that this took place and their definition was an effective solution would make good funds available to the payee within one hour or ideally one minute. Now again, I said this was about a decade ago and making funds available within one hour, that was something that wasn’t as common or even close to being common is what we have today in our payment systems and good funds.
Good funds is an important part of the definition here. Good funds means that it’s good funds, we don’t have to worry about it being taken, revoked, pulled back. So, it’s good and it’s important to know that and understand that that’s how it’s gonna work. They even said ideally within one minute, well if we look at some other definitions, what we’ll see is it could be referred to as real time, it could be referred to as instant or it could be called faster. But it is going to be an account payment that is posted to the receiver usually within seconds. Within seconds. That’s fast. We went from one hour, one minute. Here we are at seconds.
So really what defines faster? Well faster if we put a time limit on it, it really will depend on your point of view because it could be in a second it could be in a minute, it could be an hour, it could be a day, it could be a week, it could be a heck it’s gonna happen whenever it happens.
Okay nobody’s really okay with the whenever anymore. That’s how it used to feel in the old days of checks. You send a check out and it might be a week or two that it’s, you know, whenever it’s gonna hit the account. And what we’ve been able to do with electronic payments, uh, somewhat even with electronic checks and what we’re seeing with like our FedNow systems, our RTP, Same Day ACH, regular ACH, you have more control over knowing when something’s gonna, let’s say hit an account become available in in some of those like the ACH, it could be an actual debit and when and how that happens and having that control, the timing of it is what you choose to be appropriate for your use case for your situation.
There are definitely times that I want it to happen in a second. Like if it’s an emergency, gotta get that money there. But there are other times that uh, if it gets there tomorrow, I’m okay. So, defining what faster is to you based on the timeframe again, could be a second, a minute a day could be even next week ’cause I want to time it to go through at a certain time. So whatever faster is, it depends on your point of view. It depends on your needs at the time of that transaction taking place. For example, emergency bill payments, you ever been in a situation where your phone’s about to be cut off? Oh or worse, I live in Florida. What if they came in to turn off my air conditioning? That’s an emergency to me. Maybe you’re on the side of the road with a flat tire and you need money from a trusted friend or maybe good old mom and dad. That’s an emergency situation. That is a situation where your needs say, hey I need it right away.
It could also be what if you’re receiving money back? What if it’s an insurance claim you’ve had damage to your house, maybe it’s damage to your car and that’s why you’re on the side of the road and you need to get the money right away from the insurance company on the claim you’ve just submitted to be able to pay for the repairs. Or it could just be just in time, let’s call it supplier payments. You notice what he put the word supplier in there? I did because what I want you to be thinking when you’re thinking faster payments, is be careful to not go into, it’s only for consumers. No, no, no, no faster payments, they’re for everybody.
So, in this case I’m saying just in time supplier payments, it could be just in time payments for consumers as well. Just in time supplier payments though that can be for a business. Think about, like, say a restaurant who offers fresh produce, really nice healthy meals and they want to have the freshest produce they can get so they get it that day, they get it delivered that day just in time for dinner that night, right? And they could use one of these faster payment methods to be able to pay for it. So, it’s just in time for it to be able to take place.
We also see in all of this, well what’s an electronic payment? How do you define an electronic payment? I talked about checks being paper, I talked about cash being paper. Uh, when they’re paper, they’re not electronic. Can you convert a check to become electronic? Absolutely. But what I’m really focusing on is an electronic payment system where we have irrevocable funds transferred from one account to another. So, this might really fall into instead of what’s an electronic payment, the definition maybe should be what’s an instant payment, what’s a real time payment? We’ll get to more on the characteristics as we’re going through.
Now faster is important because in faster, again, maybe we need to put the word instant in real time here, there is a confirmation back to the originator that hey, this payment is taking place and it is usually way faster than one minute even. But looking at these as far as faster payments, looking at these for the different needs, like I said, it’s not just consumers, it’s not just businesses either. It’s financial institutions of what determines how and what I wanna offer. Now I told you I’m not gonna talk about strategy,
I’ve got a course for that. It’s in deeper dive into strategy, but this is reality. Your point of view determines what payment channel might be best for you for a financial institution. Usually the main concern is, I just want to know settlements taken place safely and securely for the merchants. They just wanna know, hey payment’s taking place safely and securely and I’m gonna get my money and it’s, it’s not gonna be revoked at some later time. And for consumers they just want their money. That’s right. Most people that are involved in a payment system, payment channel, they just wanna make sure that they get their money, they just want to know that they’ve got their funds. So, consumers, for them it’s just at least the appearance and access to the funds. What do you mean the appearance and access to the funds going over these different faster payment options.
It is possible in some cases, where the money is truly transferred, clearing and settlement is truly taking place. And then in some cases it’s just that the appearance of the funds that are there and what we call, you know, maybe like a memo post somebody, you know you might have heard that term, somebody may have used that term in the past and that’s where we memo post or we put the funds to appear like they’re there but they’re not there until the clearing, the settlement process is completed. Now that’s high level your account holders, they’ll know nothing about that. But if you realize where I’m coming from, a lot of times that’s all account holders care. Well, I have access and the ability to use the funds even though on the financial institution side clearing and settlement hasn’t taken place.
However, back to that priority and points of view, most financial institutions want to know that settlement is final, that it has taken place, that there’s no worry about that, you know, appearance I made having to be pulled back or taken away. So, it’s important to understand and look at from that point of view. Also, merchants, like I said, they just want to get paid. Merchants nowadays they face so many challenges with having to pay the different, you know, say interest rates without to pay the monthly fees with the worries, the concerns of payments being reversed, returned, called back and all the equipment that goes into it as well.
Plus, a lot of merchants that I talk to, like for example in the medical industry, I know some doctors, they’re really good doctors and they’ll tell me, you know, payments professor, actually they call me Kevin, I really don’t like doing all of these payments. Can you help me out and make it easier? I just want to be able to, in their case, help people. But at the end of the day, they gotta get paid too. And for financial institutions I already let the cat out of the bag on that one. You just want final settlement. You don’t wanna suffer a loss. I think more than anything you want to be able to offer quality services to your account holders, whether it’s consumers or businesses and, if possible, to make a little money off of it too.
A lot of people don’t realize the banking industry needs to make money to be able to support itself. So, I do, and I recognize that and, and you can’t offer everything for free and I do believe that depending on how you offer faster payments here he’s talking about strategy. Again, depending on how you offer faster payments, you really could make some income off of this. Now let’s go on and let’s look at some other things.
Some common traits of faster payments. Now I’m using the word faster, I’m gonna really have to say maybe it’s instant and it’s all a matter of how you define it. So, some common traits for more of our instant and real time payments are, they’re 24/7, they’re 365, they’re all day any day. I call it the Shakira of payments anytime, anywhere, yes it’s gonna happen every day of the year. Another one is they are sent within seconds. They’re sent within seconds any day of the year, any time of the day. So that means I can send a payment right now to somebody in the US that’s where I’m focusing just in the US and within seconds say get it like think like a text message, wow they go rather quick. They are irrevocable. That is really actually very important because with irrevocability it gives us the ability to make the funds available right away. Spoiler alert, that one’s coming up. So, irrevocability means that once the payment’s been sent, you can’t recall it.
Back side note time I get the question all the time. People will say, does that mean there’s no recourse if a payment was sent in error or maybe it was a fraudulent payment. And part of this series has a session dedicated to fraud and risk and I’m gonna go ahead and let you know there are some recourses as far as what can be done if something is sent in error. So even though they are irrevocable, there are mechanisms in place to be able to assist with doing things if we need to.
Just so you know, okay next they are going to have certainty of payment. There is a certainty because what happens is that part of the process, if we dig and go into the details of how some of these actually process is that we see how some of these payments, or many of them depending on the type they have acknowledgements going through saying we got the payment or saying settlement has taken place or if something fails, it’s a reject that comes back to you and it’s right away. See other payment systems you may be going, well I know they do that with other payment systems, they do, but in some cases, you have to wait until you know those deferred times before you find out, oh this couldn’t process. Maybe it’s a day later, maybe it is that day. But all of this in the case of faster, instant, real time payments, it’s happening right away. And then funds availability, we are gonna see that the funds they’re made available right away.
Now those are some of the common traits of faster payments. Each network is slightly unique in what and how it does and meets those
different traits. And those are things you wanna look at to be able to determine for you what’s a faster payment. Now something else that’s really important in faster payments is understanding
the rules and the regulations. All that is overload. What anybody look at that goes, I have to know all of that to work with faster payments. Well, okay, maybe you do, it’s not a bad idea. Here’s the thing, when it comes to rules and regulations, what you need to know is based on the type of actual payments you’re processing, what rules and regulations apply.
Like for example, ACH rules. ACH rules only apply to ACH transactions. So, when you’re doing an ACH classic, you know, next day type ACH or Same Day ACH, the ACH rules apply. Well, what if I’m doing a FedNow transaction? Well then ACH rules do not apply but FedNow operating rules do. Well, what if I’m doing an RTP transaction? Well, an RTP transaction ACH rules do not apply. FedNow operating rules do not apply, but the RTP participant and operating rules do apply. Oh well what if it’s a consumer electronic transaction over FedNow? Well then regulation E does apply. What if it’s a consumer regulation over or a consumer transaction, I should say, sorry, over ACH regulation E is gonna apply. What if it’s a consumer transaction over RTP? Regulation E is gonna apply. See the point I’m trying to get to and what can feel like an overwhelming list of the different rules, different regulations, the things that as a financial institution you have to account for, you have to be aware of, and again I know it can be slightly overwhelming, is you have to know what rules and re regulations will apply based on the actual payment channel service that you’ve picked.
Like for example too, just to go a little bit even deeper, what if you only work with businesses and you choose to use ACH or even FedNow? Well in that case Reg E is not gonna apply because re regulation E doesn’t apply to businesses. But you said Reg Reggie applied to those before I did when it involved the consumer. When it involves a consumer, yeah. Then regulation E is going to apply. So, this list, this this long, long list and one of the ones that’s right there in the middle that really sticks out and they are in alphabetical order is OFAC, office of Foreign Asset Control. And it applies to everything, every situation ’cause the whole point behind OFAC is hey we, we don’t want to fund terrorists, we wanna make sure we’re doing a good job here. Really important stuff. So, when you’re looking at the different faster payment options, you’ll wanna know what rules and what regulations apply. We’re gonna go into that deeper in a different session in the series.
Another thing to be aware of is when you’re processing files is the format that the files are in. Each payment channel service system has its own payment file formatting, like for example ACH payments they use the NACHA file formatting standard depending on your SEC code will depend on what information has to be within the ACH file. We see ISO 8583 very important for the card networks. And then we have ISO 20022. ISO 20022 is actually a messaging standard. Well, it’s in international standards organization iso, just like we saw in 8583 and 20022 is really the global standard for faster payments. Although it can actually be slightly unique based on how it’s being used. So, you need to know and you need to be aware of what the format is, the file format. Why, because that determines what information, what data can go into it.
Different formats allow for different levels of information, not your files. They do allow for you in many cases to add what we call an agenda records or additional information, but it’s, you know,
just under a hundred characters of data. Whereas if you look at the ISO standard, you can add almost 9,000 characters of data. Depends on your situation though. Depends on your need, depends on what you’re offering. It depends also on the speed.
Now let’s, let’s, let’s, let’s, let’s slow down for a second. We’ve been over a lot. We’ve talked about clearing and settlement. I’ve said you gotta be able to define what is faster and faster. It’s again, it’s gonna be determined by you and what you believe is gonna be faster. We then really hit it hard with, you know, hey, what’s this matter to me? What do I need? Who, who’s going to this gonna benefit? Uh, how’s it gonna benefit the different parties involved? And then that, that last slide there on the rules and regulations just need to take a breath. But it all ties in together and all works together, and it gets to the file formats to is another area that’s important because you’ve gotta have systems and services that can support those file formats.
Now what I wanna do is I want to transition into looking at some of the actual players, some of the actual networks that are out there when it comes to the world of faster payments. We’re gonna start this part of the journey off with the t p network and the RTP network. Well, the RTP network, what, what, what is this? Where’s it come from? Who does this one? It’s been around since around 2017 and it is actually not short for real-time payments. I don’t wanna mislead people here. RTP doesn’t actually stand for RTP payments or real-time payments. They’re just RTP. I think it should because that’s how people know it, learn it and that’s what they say. But if you ask the clearinghouse and the clearinghouse is the owners and operators of the RTP network and the clearinghouse being the largest private bank in the us they, they are the bank or I think of them as like, think of the clearinghouse like a banker’s bank. They are the bank for large banks, for banks that are members of the clearinghouse to be able to do their processing and they did go out and create their own payments network. That’s pretty cool.
In fact, the clearinghouse offers a lot of payment services similar to the Federal Reserve. We’ll see that they offer check services, they offer wire services as well. They offer ACH services as well. They have their own names for their services. Well, they did create and launch in 2017 the RTP network, which is a real time payments network. And we’re gonna go in the details of those. Uh, before I keep going those, some people may be going, why do we have all this private sector stuff? It’s not uncommon around the globe to see private and you know, let’s say government central type government offerings. And we see it in a lot of different countries and like I just said, there are similarities between what the Federal Reserve Bank does here in the US and what the private sector offers as well. And it’s, it’s worked harmoniously together for decades. So, it is actually a really good thing. I encourage and support you to find a solution that’s best for you, whether it’s private sector, public sector or both. Again, find what works best for you with an RTP payment.
Some of the things that we know is it is a credit push only payment, no debits credit, push only payment. It does have a million dollar limit. They are irrevocable, but like I said before, doesn’t mean you can’t get it back. There are mechanisms in place. However, think of ’em as once they’re gone, they’re gone, and they’re supposed to be and they’re rather quick. They do have what we call a request for payment.
Now a request for payment, let’s take a second here to analyze this one. A request for payment is available in RTP and other payment channels. I’ll point it out as we’re going through them. And a request for payment is not a debit but it is let’s say a debit alternative or a debit option maybe, I don’t know careful with their words here. What a request for payment is, is it’s basically a request for money. A request for payment is a way of saying or sending a message. Like I send a message to one of you, hey you owe me $10 for dinner last night. You received that request and you’ll look at it and go payments professor, I don’t know the payments professor or I didn’t eat anything or that’s amounts wrong. Or you might be going, oh that was a really good dinner, we had fun and we talked about payments throughout the whole dinner. It happens, great dinner, trust me. And you go, okay, either I’m going to pay it or I’m not gonna pay it. If you choose to pay it, you respond with a credit push. That’s how it works.
On a request for payment, instant payment network and the RTP network, the request comes in, but it doesn’t actually debit anybody’s account. The request comes in and the receiver, it could be a business too. I want you to know that it could be a consumer as well chooses whether or not they’re gonna respond with a credit push. Now they also can choose to nope, nope, not gonna happen. Not doing it. So, the option is there. That’s important to know that there is the request for payment, but it doesn’t require that somebody responds. But is there the ISO 20 0 22 messaging standard is used for RTP. That means these are one at a time payments, these are 24/7, 365. These are immediate acknowledgements too. These payment actually these take place in five seconds. Like actually faster than that. They’re available anytime, anywhere.
Well U.S. domestic if the participating financial institution and they basically it is every week of the year, every day of that week and every minute of that day a payment can be sent across the RTP network. They are using some, you know, great security features. There’s all kinds of security and functionality is another way to be able to look at it. That is out there and available. They have tokenization, they have aliases, they have directory services, and they have the option for how you use the network, how you participate. This one’s really important. It says FIS can be receive only or send in receipt.
Let’s focus on that one for a second. You can be receive only, I probably should put quotes on there. Receive only or you can be send and receive. Now what’s that mean? That means when you sign up to be part of the RTP network, this option’s available in other payments networks too. You can choose that. I just wanna receive payments, I want to be enabled so that my account holders, they can receive incoming payments but you don’t allow ’em to send because you’re receive only. That’s fine. In fact, I encourage a lot of you when you’re first starting out on a new network, start off as receive only.
But the other option is you can be send and receive, you can choose to receive payments for your account holders, but you can also choose to offer the service of your account holders sending payments, pushing credits out. So, on that network you get the option of you can be send and receive or you can be received only. And then there’s the RFP option, whether or not you wanna work with that one. So real important, what we’re looking at here is there’s the credit push only. It’s a million dollar limit. You can use the request for payment. It’s using the industry global standard of ISO 20022. It’s any day, anytime anywhere. US domestic only. And it does have a lot of security features, functionalities, extra services that are built into it. You can choose to be send, you can choose to be sent and um, receive really, or you can choose to be receive only. However, one thing important and we see it in all payment channels, you do have to make sure you meet your annual audit requirements.
Now you might be saying, hey wait a minute, you talked about this being private sector. Uh, can anybody join the RTP network? Well, yes and no. And the answer’s more yes by far. And, what this graph really shows you is, there are, and it can feel overwhelming. I know I get it. But what you see at the middle there is the clearing house’s, real-time payments network. And what it depicts is there’s many ways for a consumer or a business to be able to make use of the network, but it first requires a financial institution. This is a network that is utilized by banks and credit unions in the US and all banks and credit unions in the US can go to the clearing house and can sign up for the RTP network to then make it available to their account holders. So, it is out there, it is available option, like I said, it’s pretty cool and it is there. You can also go through um, some third party service providers that are out there too. But again, it’s gonna ultimately go through a financial institution.
There are a couple other things that are important to understand about the RTP network. Uh, you’ve gotta be signed up, you’ve gotta be approved, you’ve gotta be known on the network, you’ve gotta be a domestic financial institution. You may have international ties, but you need a US routing number to be able to work with this. And you will have to work out of a pre-funded balance account that is at the Federal Reserve Bank of New York and it’s what we call a joint account and it’s shared by everybody. Lots of details on RTP, A lot more to learn. That’s well beyond the scope of this presentation. I just wanna make sure that you’re aware that it’s out there and that it is available. So that’s the RTP network again from the Clearing House.
One of the next ones I want to talk about and it’s the hottest topic of this year folks. So, this series FedNow Instant payments. What are FedNow Instant payments? Well, I’m gonna start off with a definition and I know you guys can read the screen, but it says it’s the new instant payment service from the Federal Reserve Banks to enable financial institutions everywhere in the US to be able to provide instant payment services every day of the year. Yeah, that’s the Fed’s definition. That’s pretty awesome. It is basically just like the RTP network in many ways, but offered by the Federal Reserve Banks, offered by the public sector.
When you look at FedNow, FedNow first of all does have a different limit than what we see with RTP. Now these are current limits. Go ahead and let you know. Limits change with networks. Uh, we see new networks get introduced and they usually have a lower limit. And then as time goes by, as we identify risk and controls and we get more comfortable with it, the limits go up. So, with the FedNow system, the maximum amount is actually 500,000 and uh, you know, if you’re taking notes, it actually defaults to a hundred thousand. You as a participant in the FedNow network, you have to go in and raise that limit if you want it to be higher. So, it is a maximum though of 500,000. It is a payment that’s gonna process within 20 seconds.
I know I said RTP was five. Well Fed gives you up to 20 seconds. They do process it slightly different, but it actually is gonna process much faster than that. Like all of our other, well our other one other system, it is 24/7 is 365 always on, always available. It also makes use of the ISO 20022 standard. So, we see FedNow instant payments using the 20022 standard one at a time. One off payments using the 20022 standard and it is access through FedLine. Okay, 20022 standard. We saw that with RTP, we saw it with Fed. Now are these the same? No, even though both systems are using the same messaging format, it’s not exactly the same. I like to explain it like this if uh, okay, if you speak Spanish, you probably realize that Spanish in Spain it’s Spanish and in Spanish in Mexico it’s also Spanish and it’s the same, but it’s actually different. I’ve experienced this one firsthand. I’d say certain words and it’s like, whoa, wait, wait Li uh, whoa, wait, how are you pronouncing it? You know?
And there’s some differences that are in there. So even though there’s a lot of similarities, there are some slight differences that make it to where the RTP network and the FedNow instant payment network, they’re not currently compatible with each other even though they are using the same formatting standard. All right, back to class. Next thing we’re gonna see is it does require seven day accounting. So is the RTP network. And this is, that is something that is new and different for financial institutions in the US. It’s basically new for the Fed too is we have just historically had our Fed banking day or our federal reserve banking day. Now that’s gonna be every day and it is gonna include weekends and holidays that you will need to account for. It does have just like we saw before in our other faster payment network, the ability to be a send and receive or a receive only. So, you can choose to just receive payments across FedNow, or you can choose to send and receive payments. Again, very similar to each other.
It does have the RFPs as well, which means the request for payment option is there and available within the FedNow network. And if you look at how payments flow, that is something that’s important to understand in the FedNow network, it’s, this is just a diagram to show you how a payment’s processing. The big thing that I wanna show here is, in really in every payment channel, you’ll have in the middle the Federal Reserve Bank or it could be the clearing house, but you have what is really the central processing location and that’s the service itself. It gets connected to the sending and receiving financial institutions, which could be a bank or a credit union, could also be a banker’s bank, could be a corporate credit union, could be what we call a correspondent bank even. And it could be a service provider working on behalf of those institutions as well. And then you have your sender and your receiver.
The big thing to get out of this particular diagram and really when you’re looking at all your payments is to know how they flow. But to realize one thing, they always start with somebody wanting to send a payment and they always end with a receiver of the payment. And then in between is the real network itself. And to connect to that network, it requires a bank account, either at a credit union or at a bank itself. And again, the sending financial institutions a receiving financial institutions, it could be a bank, it could be a credit union, it could be a large one, a small one, a community one, it could be a banker’s bank, it could be a corporate credit union, it could be a correspondent bank or it could be a third party service provider working on behalf of one of those entities. But it is required that you go through the proper channel so that we maintain security within them. All right, that’s our FedNow network. It is very similar to the RTP network. It’s really fast, it’s all day every day. Any day it happens in less than 20 seconds. You can be sinned, you can be uh, send and receive or just receive only. There is currently a $500,000 limit. It does default to a hundred thousand. I did say that. And it is something that is available to financial institutions that sign up and are part of the network again offered by the Federal Reserve. It will require seven day accounting, which is somewhat new for Fed Services.
Now our next payment option that I wanna look at is actually ACH. Now when I bring this up and I start talking about ACH is a faster payment option, there are some in the industry that’ll say, I don’t think so. And then there are others that’ll say absolutely. The question on this one is what do you say? Well, I’m gonna tell you what I think. I think Same Day ACH is definitely a faster payment. I believe my opinion, I told you I’d give it to you. My opinion is Same Day ACH must be part of your overall faster payments strategy. It’s just, it fits in too well. ACH has got such a great history, it’s secure, it’s reliable and there are times that same day is definitely fast enough depending on what your needs are and then that’s where it really can come down to what are your needs. So, I think you should have Same Day ACH as part of your faster payment strategy.
The truth is, Same Day ACH is just faster ACH but that’s huge. See with Same Day ACH what we do is we have our faster payment taking place even though it may not match the actual definition of what we call it, faster payment. I really would say maybe we look at same to ACH as faster and we call the other ones instant in real-time ’cause that’s what they are. So real-time payments, instant payments, new network, Same Day ACH though it is an enhancement, it is in my opinion, incredible improvement upon the existing ACH rail. Same day ACH it is offered from Nacha, Same Day ACH comes from the same association that created the AP and APRP go get certified exams. And also is the overseer, the watcher, the, you know I wanna say, the protector of the ACH network.
Currently a Same Day ACH allows for a million-dollar entry. Now Same Day ACH, it’s not just credits, it’s also debits. RTP, FedNow, credit push – only our RTP FedNow request for payment but Same Day ACH – oh you can send credits and you can do same day debits as well. That’s unique for Same Day ACH. That is why one of the huge characteristics of why I say keep it in your bag of tricks, your toolbox for faster payments. One that everybody needs to know Now other characteristics that we need to look at when it comes to same to ACH, it settles in windows. So, it is more of our deferred settlement taking place at certain times throughout the day. There are multiple windows. The last window is available until 4:45 PM Eastern time. It’s important to note too that it is only on what we would call, say, a Federal Reserve banking day because the Fed has to be open for these ACH transactions to process. Uh, there is the ACH Network over on the clearing house as well.
EPN Electronic Payments Network. Now again though ACH especially going through the Fed, it is only gonna process and settle on business days. So, we don’t have this option available on weekends and holidays. At least not yet. And I don’t see that happening in the near future either. That is something to consider. You can say it’s a limitation, but I would also say to match that limitation, there are certain times when Same Day ACH is gonna be the better option. It’s not real time but it is definitely faster.
ACH I jokingly said you know what is Same Day ACH, it’s faster ACH. Well, it definitely is faster ACH and with Same Day ACH, financial institutions can receive same day entries and OD FFIS you can choose to originate them or not. Wait, what’s that mean? Well, Same Day ACH you can send, or you can send and receive, or you can just receive so you got that same send and receive or just receive option that you saw before. It’s up to you. You could choose to not send any same day and choose everything to be next day if you want to send but you have the option to be able to receive. Again, ACH has got a huge history. ACH, if I compare it to the other networks, it’s, it’s more endpoints, more routing numbers connected currently to the network than any of the others because it’s been around longer, it’s been around for 40 plus years, almost 50 years now that we’ve seen ACH out there processing. So almost every financial institution’s on the ACH Network, I would actually be surprised to find one that’s not. And because of that, the history, the security, the reliability, the fact that we have the multiple windows, even if we’re restricted to only Federal Reserve banking days, it gives it a lot of use cases. It allows for up to a million dollars similar to what we saw on the RTP per entry, and it does have debits as well as credits.
Now some people will argue debits are where we have a lot of the disputes and issues, and we want to get rid of those. I’m not gonna say that’s wrong, I can agree with that, but I definitely do believe Same Day ACH has got to be in the toolbox and the discussion when it comes to faster payments and when it comes to faster payments, one other one that’s definitely in the discussion today, it’s Zelle®.
Zelle®. What? What is Zelle®? Well, you probably have heard Zelle®, you probably have seen the commercials. Zelle® is an option that is available, well one in the app store, a lot of people can download and use the app, but more predominantly we are seeing Zelle® in the different uh, financial institutions. It’s actually owned by early warning systems. It’s primary focus is P2P transactions. Okay, now I say that, but I also want you to be aware that there are some business cases I got it’s coming asterisk here, but I do know that there are some businesses that are at least advertising that they will pay with Zelle®. Uh, there’s a certain car company I saw a commercial for recently that says they will use Zelle® to be able to, you know, pay for your car, things like that. So even though it’s been historically focused on P to P, there are other options that are available with it.
More things to look at it, it does work in near real time if both financial institutions are signed up on the Zelle® network. What do you mean if well remember I did say it could be the app and it could be connected in other ways. Now it is in real time if both are on the RTP network because Zelle® can actually piggyback over the RTP network. Now this is also understanding networks versus channels too. Zelle® is really more of a network. RTP network is really a payments channel, but they call it a network I know but it’s a channel and the channels like FedNow, RTP, ACH, they just provide the road for payments to be able to travel across. Zelle® is more like the Ferrari ’cause it’s really fast that gets on there and moves at high speed across those payment channels. It can work without having to know routing number and account number information, which in the world of payments is huge and that’s what we call eliminating friction.
So, it can make use of just a phone number or an email to be able to transmit data between parties. It does actually in some cases use the debit card rails outside of uh, for outside network entries. Zelle® is got a lot of flexibility as far as the payment rails it uses. I know sometimes the settlements on ACH, sometimes the payments go across RTP depending on the participants and sometimes it does use debit and credit card rails and it is a credit push, so it is gonna be the pushing of a payment. Uh, there’s not a debit mechanism involved in these. That takes us to our faster card network programs.
Now I did say faster card networks like I mentioned with ACH. ACH has regular ACH and there’s the faster Same Day ACH. Well, our card networks are already pretty fast and what we’re seeing is our card networks, they’re starting to expand as well to offering real-time services. So, you’ve probably heard of Mastercard, well Mastercard also has Mastercard send and Mastercard send is an offering from Mastercard that helps to be able to work with businesses and banks to be able to send faster payments. And yes, it does say cross border on here.
I need to go here to show you why that’s there. If you do go to the website and this is all information I uphold directly from their website, what you will find is information about how Mastercard send works. So, it does move rather quickly. It does offer domestic and they advertise cross-border payments. Now when advertising cross-border payments, I want you to know cross-border payments bring whole new rules and regulations along with them. I mentioned OFAC earlier. OFAC is one of the biggest concerns that when we start going cross-border, cross-border brings interchange considerations that have to be there and then we have the rules and regulations on this side of the payment or in this country. But when we jump over to another country, more rules and regulations get into play.
I don’t know all the details of exactly how Mastercard send works cross border. My focus nowadays is more on RTP than now and ACH, those are the ones that I see as the predominant payment channels. This is gonna be more of a payment offering or service that you can have if you work with Mastercard already, you should probably talk to your contact about the potential for Mastercard send. However, I still encourage you to look at what’s gonna be available with RTP FedNow and Same Day ACH, especially in at least a receive capacity.
Other aspects about it is, it’s growing constantly. They say they’re available in over a hundred countries. I believe that, like I said, if you’re already on it, it integrates quite quickly into your system. All right, we’ve got Mastercard, well we also are gonna have Visa direct. Now Visa direct payments, these are gonna be very similar to what we saw Mastercard with Mastercard send here we have Visa but they have Visa Direct and this is taking the same concept and it is working with the existing systems rail that is there to have a real time capability to be able to send and receive payments.
Now in going this direction I do want you to know I’ve talked about Zelle®, I talked about Mastercard send, I talked about Visa and you know they are the card networks least Visa and Mastercard send. Something else I think is important to understand is the concept of closed loop and open loop networks. Now the open loop networks are gonna be like your RTPs, your FedNow and your Same Day ACH. They’re open to all financial institutions to sign up and become part of that. How you use it once you’re signed up is up to you. You’re gonna really be in at least a receive capacity but you could use it beyond that too. Then the closed loop networks of what I’m about to go into means they’re closed to people that are participating within that more private type of network.
Now it’s a little confusing because I mean these are really what they’re the app stores is what I’m gonna go into when we talk faster payments, there are some other options that are out there. One of the first ones I call a Cash app. Now what exactly is Cash App? You probably knew it as Square Cash at one point in time. It’s been a little while since it was called that, but it did come from Square. It does offer financial services. There are a lot of people that work out there using it. It has had a lot of focus on the underbanked, which has given it some serious success. Um, I have used Cash App. I will, I readily admit I have used, I have Cash App, I’ve got friends that will send me money that way. And it does provide you virtual routing and account number information if you want to be able to get direct deposits so it can work like your financial institution. And it does have a virtual account.
Something that is interesting too is you know, depending on how you feel about cryptocurrency, you can buy Bitcoin through the Cash App. But Cash App is also heavily extended into businesses now. There is Cash app for businesses, and it helps small business owners to be able to have a way to manage their well business accounts. And uh, well this is something I’m paying attention to. Let’s just say ’cause Cash App’s pretty cool and how it works very easily with cash tags and with QR codes. It also can work with emails and phone numbers and makes it really easy to receive payments from your commercial consumer customers.
With the business accounts though, I do have to point out these are fees that are public on their website to let you know what the fees are. I will tell you this too, I don’t know of any payment channel that’s 100% free as somebody who’s a consumer receiving payments. Okay, maybe it is part of your free checking account, but otherwise, and a lot of these other ones, when we start getting into the business aspect, there’s going to be some type of fees that do get paid. So, with Cash App you do see at least how they’re advertising that there is gonna be a processing fee.
Our next one then is Venmo and Venmo. Well, you’ve probably heard Venmo, I mean Venmo’s become a verb. It’s really quite interesting as here I go into talking about Venmo is I’ve had personal situations. I just told you I use Cash app and I have my friend Scott, if you’ve ever seen me in conferences. I talk about stories about my friend Scott, and he’s a private business, small business owner, runs his own painting company and the hassles that he has with payments, oh my gosh, he’s got, he’s never ending, you know, stories for me about what’s happening in the world of payments. And I got him to start using faster payment systems or options a couple of years ago. And when he first did it, you know, we talked about it and then he, he got brave, he went out on his own. And it came down to we went to dinner, he didn’t have his wallet. He does that a lot if you’ve heard my stories. And he’s like, I’m gonna get the money to you. He said, I’m gonna Venmo you the money. I was like, all right. Well, the next day I see him, and I was like, hey, I haven’t got my money yet. He goes, I, I Venmo it to you. And I went, you sure? He’s like, oh man, he felt depleted. He goes, okay, here’s my app. Look what I did. He showed me Cash App, but he said Venmo. And that’s because Venmo’s been around for a long time.
Venmo is a heavy topic of conversation just because of what emojis I, I do a presentation, as you’ll see when we talk about use cases where I incorporate how the world of Venmo emojis has helped us all to learn the different use cases that are out there. But Venmo is a really a closed network of where you have money in virtual accounts, and it allows you to be able to connect to people who are also on the Venmo network to be able to send and receive funds back and forth. And like Cash App, Venmo has gone into the world of businesses as well. If you’re on PayPal, ’cause Venmo is actually owned by PayPal. Venmo’s made it really easy for you to be able to expand offerings into the business world because you are on PayPal. It expands that reach of what you can do and allows you to have the ability to expand onto that. However, just like credit cards, just like really our other, all of our payment options as a business, there’s gonna be some fees.
These are the fees that of course are on their website. So, when we look at and we think of the basics of faster payments, the things that I really think you should know are what are all the different options and offerings that are out there? We have the private sector or the closed loop systems like we just saw on Venmo Cash app. They’re not really offered, not really, they’re not offered by financial institutions and that’s why you want to be able to focus on things that can be offered like your Mastercard send and Visa direct from the card networks or then there’s also, you know, Zelle® now at days which is kind of a gray area ’cause it’s bank and credit union but it’s also in the app store. I do gotta say that. However, it’s much more bank and credit union and, and it works quite effectively.
I’m a user, I’ll admit it. And then we see our Same Day ACH, our FedNow and our RTP, which I see as being the predominant faster payment networks, RTP and Fed. Now being our more instant real-time payment networks, whatever network we use, we do have to consider what are gonna be the rules, what are gonna be the regulations for that network. We also know as I, I went through rather briefly when we talked about lease fed. Now you always have a sender, you always have a receiver and then in the middle is where the payment’s really taken place and that’s where you have your financial institutions sending and receiving. It could be credit unions, banks, correspondents, respondents, corporate credit unions, bankers, banks, and in some cases third party senders that are gonna do it. But most important knowing all of that is how do you define a faster payment?
The way you define a faster payment is gonna be up to you and a lot of the times, it does come down to the needs of your account holders and you can offer multiple options. I’m a fan of that too ’cause you probably said he’s a fan of a lot of these payments. I am and I do believe, like for example, the main three, I think that in offering faster payments, all financial institutions should consider RTP definitely FedNow and without a doubt ACH, Same Day ACH. Now that is a lot of information.
One thing I wanna leave you with is I am the payments professor Kevin Olson. You can find me all over social media talking about electronic payments, but this is the part where I get to say class dismissed.
2. FedNowSM Introduction
This video provides a brief introduction to the FedNowSM Know Now video course.
Hey everybody. Welcome to the Payments Professor course on What to Know About FedNow.
In this course, we’re gonna look at many different areas of FedNow. We’re gonna begin with what it is and how it works. In fact, we’re gonna have what I call the Banker’s Dozen. The questions you should be asking, or probably are asking when it comes to what is FedNow. We’ll look at things like the flow of a transaction and what you can expect to be available when it comes to that initial release, and when will that release be expected, when will it be available, and what more can you expect? Before we go any further, I just wanna say I commend you for taking the time to work on your education and your career.
Now, what can you expect from this course? If you’ve never been in a payments professor course before? Let me go ahead and tell you we’re gonna have fun. I like to have fun. I like to, you know, just make this engaging and entertaining as much as I can. Now, it is electronic banking, so gimme a little bit of a break. I’m gonna tell you the technical or official definitions of stuff. We’ll, of course, even sometimes quote rules. But then this is where things get a little bit different.
We will break down the information in ways that are easier to understand, and again, have a little fun along the way. And people ask too, you know, there’s something wrong with your filter. There’s not, I don’t have one. So, you’re gonna get raw uncut payments professor explaining everything. And you know what, as you go through each module, you’ll have short videos, just like this introduction video, and some of the modules, I’m gonna have to tell you too, you might have a quiz. Yeah, we like to have quizzes. It’s the payments professor.
So don’t be surprised with occasional pop quiz. But the videos, the quizzes, you can take ’em whenever you want. You can watch them whenever you want. You can take the entire course at your speed. We might be talking faster payments, but that doesn’t mean it has to be faster education. There’s no having to rush through everything crammed into your head in 90 minutes with an instructor that’s in a dry, boring voice that reads the slides. Oh, with way too much information. No, we don’t do that. We let you go at your speed. If you want to do each module, haul it in one day, one sitting, go ahead. It’s up to you. If you want to do one a day, go ahead. It’s up to you. It is completely up to you.
You also have the option to pause, repeat, rewind, revisit and relearn any sections of the course that you want to, without having to sit through those boring parts You don’t want to. Now, there is gonna be a lot to be covered and processed in this course, but remember, you get to go through the course at your pace. So, if you’re ready, ready to learn more about FedNow, then it’s time to move ahead to the next class. I’ll see you there.
3. What Is FedNowSM?
Start your FedNowSM journey with an introduction to the FedNowSM Service.
What Is FedNow?
Hey everybody. What is FedNow? Well, FedNow has been the headlines for a while now, but people continue to ask, well, just what is FedNow? When will we have access to it? How’s it gonna work? Well, it’s time to start answering those questions and even more. Are you ready? Because when it comes to FedNow, here we go, now.
The FedNow Service is a new instant payment service that the Federal Reserve Banks are developing to enable all financial institutions, and that’s all banks and all credit unions of all sizes, every size, small, medium, and large, anywhere in the U.S. to be able to provide safe and efficient instant payment services in real time, 24/7, 365, and 366 on leap years, of course. It’s an always on, always available instant payment system.
Financial institutions that participate in the FedNow service will, they’re gonna be able to provide their account holders – that’s gonna be corporates, merchants, retailers, businesses of any size as well as individuals, consumers, and everyday people just like you and me. And we will all be able to send and receive instant payments conveniently and easily. See. Instant payments will be instant. Well, what’s that mean?
This means that as a receiver of these instant payments, you will have full access to the funds in seconds. Yeah, seconds, not hours, not days like we’ve seen in the past with other payment channels. That’s why this new FedNow service is so exciting. See this new FedNow service is all about providing instant payments. This means that as an account holder, whether you’re a business or a consumer, you’re gonna have so much more flexibility to be able to manage your money and make time-sensitive payments.
I know this is gonna be a big advantage for me personally and as a business, why aren’t we just calling them faster payments? Well, that’s because the Fed transitioned to the term instant payments.
That’s why I keep saying instant payments, and that’s how they describe the types of payments the FedNow service will support, and that is also to be able to distinguish them from other faster payment types like RTP or even Same Day ACH.
Instant payments will specifically refer to payments in which an end user receives funds in near real time with immediate interbank settlement of the payment also occurring in near real time. Pretty cool, right? I think so. Again, make sure you understand Instant payments different than Same Day ACH, different than RTP. The Federal Reserve Banks have a long history of providing financial services IT days back all the way to 1913. These are services that we’ve all seen in electronic banking. Checks, wires, ACH, and even, you know, the distribution and collection of coins, as well as other services.
Well, FedNow, it’s gonna be very similar to how these other services work except for the speed and provide payment options that are available to all. For example, the Fed provides check clearing and settlement services on the check channel, but it is the industry, the service providers, the banks, and the credit unions that offer unique services like remote deposit for consumers and merchants or lockbox services for merchants, as well as other check-related products.
Then there’s also Fed ACH. Now Fed ACH allows for the processing and the movement of AACH entries by participating financial institutions. That’s what the Fed does, is they allow it to move between the financial institutions. The Fed offers risk management reporting, clearing settlement services for safe and secure movement of AACH payments through the ACH payment channel. But it is the banks, it is the credit unions.
It is also the fintechs and the service providers that provide services like payroll and bill pay, as well as many other services on that, ACH channel through the Fed. The FedNow service will operate in a very similar fashion by providing the channel for these instant payments to travel and the delivery of the payments that come from the banks, the credit unions, and the fintechs and the service providers. Well, in many different ways, I truly believe, in fact, I know, that we’re gonna see the industry will find ways to create and definitely take advantage of this service. We’re seeing it in all kinds of places around the globe.
Now you may hear the question, you’re going to hear the question. Trust me. Why do we need this FedNow Service if we already have RTP available from the Clearinghouse? It is not as far-fetched as you might think.
Okay, the Federal Reserve, they have a historical role of providing payment services alongside private sector providers. The clearinghouse offers ACH via UPN, and the Fed also offers ACH. The Fed offers check-clearing services, and while the private sector has check offerings as well, it’s not uncommon at all to run side by side. And by providing the FedNow service, it will give options and choices to the banking industry for the clearing and settling of faster payments. For real-time payments, for instant payments, as well as promoting resiliency through redundancy. Redundancy. What kind of payments will FedNow offer?
FedNow will provide financial institutions, fintechs, and service providers the ability to provide innovative, instant payment services to their customers, businesses, and individuals. These could be new ways of offering payroll, of paying bills, of crediting accounts, or any way the industry sees fit to offer payment options. The only limitation will be that these are credit push only payments. But these payments will be able to be offered in multiple ways as the industry sees fit or comes up with, okay, the FedNow service will work as the platform, the channel, the super speed highway, if you will, to be able to transmit the payments instantly.
The Federal Reserve Banks have made implementing the FedNow service a high priority but want to do so in an efficient and safe manner. It’s not something we wanna rush. Trust me again, the target release date 2023, and they have agreed to keep us updated and to announce more specific launch timing information once they have completed any additional development. That’s good. Keep us all informed. We appreciate that.
The Federal Reserve, they’ve also announced that the FedNow service will be deployed in phases. Hey, guess what? That’s nothing uncommon in the financial industry [when] it comes to the release of software. If you come out of the stable with a foundational version that offers basic services, then expand on it over time. Well, that’s a great approach, that phased approach. It will also help to ensure that the initial service can be launched expeditiously so that additional features and enhancements can then be released in stages after that initial launch. I’m a fan, I’m a big fan of the phased approach as it will allow for adjustments and improvements in response to industry needs or changes in TE technology. As we learn things, we’ll adapt and overcome; this is definitely the way to go.
So what, what is FedNow? Wait, you asked that at the beginning. Well, to sum it up, FedNow is a new Interbank 24/7, 365, real-time gross settlement service with integrated clearing functionality to support faster payments for financial institutions of all sizes in the United States. And it is available to all institutions that are eligible to hold accounts at the Reserve Banks. It is a service that will allow real-time clearing and settlement at the time of the transaction, resulting in real time, or wait, wait, as they call it, with FedNow instant payments.
So what will this mean? It will mean an immediate transfer of funds from one bank or sender to another bank or receiver. Now that could be banks or credit unions. Well, I hope now you have a better understanding of what FedNow is, or you may be like I was when I first went through all this information than I’ve got more questions like, how will it work? Who’s going to even use it? What are the features? What are the functionalities? What will be included? Well, if you’re ready for those answers to FedNow, then it’s time to move on to the next class.
4. What Will Be Included in the FedNowSM Launch?
Discover the features and functionality that will be available at the initial FedNowSM Service launch.
What Will Be Included in the FedNow Launch?
We’ve been hearing a lot about FedNow, and there are a lot of questions that keep coming up. What is it? How will it work? Who can use it? Will people even use it? Well, how will they use it and what are the benefits? What are the features? What is the functionality the FedNow will have? Well, in this class we’re gonna look at those features and functionality. Are you ready for more?
Features and functionality are key to understanding any payment system, understanding how it will work, and more importantly, will it work for you? We first discussed the Fed said they would be offering faster payments. We know now from recent Fed updates that these payments will now be referred to as instant payments. Instant payments. Well, professor, what exactly are instant payments? You see, instant payments, they are credit push payments that once completed are final and irrevocable, and it takes place within seconds or let’s say instantly, hence instant payments.
Now these credit push transfers will require that the sender will have to authorize and then the sender will initiate each and every payment, which will help to decrease the risk of fraudulent or otherwise unauthorized payments, and also enhance the safety of the payment system itself. Well, when will these payments be available? Not as in when will the Fed make the service available, but more like when will the service, when it goes live, how and when will it be available? When it goes long? Well, the answer to that is the Fed service will be available 24/7, 365, 366 on leap years.
That means it’s all the time. This is different than what we see with their other services that are being offered from the Fed. For example, Fedwire, Fed ACH, each have times that they are open and available, but there are also times that Fedwire and Fed ACH, they’re not available. FedNow will be available every day, night and day, all the time. Well, that’s pretty impressive right?
Now you may be saying, professor, we got this from What Is FedNow class. You’re right, you did. But what is important to understand is what will be required from the Fed for this processing to take place. You see, the Fed will be creating and offering features to enhance the experience for all financial institutions by broadcasting participant availability to support their transition to a 24/7/365 operation. That’s a big change.
They’ll have a user interface to support data needs and the ability to have access to balancing information even on weekends and to balance everything that will also require that the Fed will also need to offer, similar to what we see in other Fed services, and that is clearing and settlement abilities. It really will be critical to financial institution participation. And one of the first things that will be made available in the release of FedNow, and that is of course the core clearing and settlement capabilities. We’ve gotta have core clearing and settlement capabilities. It’s key. It’s what they do on other payment systems too. You see core clearing and settlement capabilities are there to support well, a range of transaction types and even use cases. We’re gonna get more into those use cases and a future class and even more into the tights as well. All of that’s coming soon. But a major buzzword that we see in the world of faster payments is ISO 20022.
It is in use in most faster payment systems around the world, and it’s gonna be part of FedNow. This is great news. You see ISO 20022, it’s a standard that is widely accepted and it’s considered to be the industry’s best or sound business practice for the support of interoperability faster, or we should say the Feds in instant payments will be new to everyone and to support flexible adoption, including support for the use of the service providers and correspondence. And there will be an option to enroll as a receive only participant, something that was not uncommon at all in the early days of ACH.
Now, there will be other value-added features, including things like the request for payment capability and tools to support participants and their handling of payment inquiries and reconcilement. Even in a credit only system, there still must exist a way for bills to be paid and collected and the request for payment capability. It will be able to do that.
Now, faster payments could equal to faster fraud, so FedNow will have features to support payment integrity and data security, and also tools to help financial institutions combat that fraud, such as things like transaction value limits and reporting features as well. Transaction limits, they’re important. I would say they’re critical, and the Fed has announced that the initial dollar limit per payment is going to conform to what we see as far as market standards or market requirements, and well, what we have seen with other payment channels.
The Fed has proposed the limit for credit transaction values will be a maximum of 500,000 per transaction. But make sure to note that Fed will have all participants set at the default limit of a hundred thousand. We saw that both Same Day ACH and RTP started with limits of 25,000 per entry or per transaction. Though both were eventually raised early, even in their introduction, the initial limit it allowed for users, and that’d be financial institutions especially, to use the service and learn the intricacies of the service, then become more comfortable with the risk management of the service as they learn how offering those types of payments and in this case, instant payments will impact their financial institution or their corporation or their business.
Now FIs, you guys can go out there and impose your own lower limits on your customers businesses. Third-party centers, service providers, you may do the same. Now, financial institutions will also have access to liquidity management tool. The liquidity management tool will allow them and others to transfer funds to each other to support the liquidity needs of instant payments. That’s a big deal.
And because the Fed is taking a phased approach and releasing Fed now, they have announced that after the initial service launch, they hope to offer additional features related to fraud prevention, error resolution, and case management. This is cool. We got more on the features in another class. This will also continue to explore other features like what? Well, like the potential support for P2P or person-to-person payments that use the alias of a receiver. Something that we have seen be very successful in other countries and other payment systems as well, especially when offering those faster payments. So now we have to ask, how do you feel about FedNow?
Now think those features at release will be what is needed for the industry. Maybe you’re still looking for more. Well, if so, then it’s time to move on to the next class.
5. How Do You Access FedNowSM?
Learn how different entities can gain access to the FedNowSM Service.
How Do You Access FedNow?
Hey, everybody. How do you access FedNow? Well, that depends on if you’re a bank, a business, a consumer, a credit union, a fintech, or a service provider. See, access to the FedNow service is gonna be available in many ways, and it’ll all depend on who you are in the industry as to how you’ll gain access to the network. First, let’s make sure we all understand that.
FedNow is going to serve as the channel or the highway, actually, let’s say the Super Speed Highway for sending and delivering of instant payments. But it will be up to the banks, to the credit unions, to the fintechs, to the service providers to be able to provide what, oh, to use an analogy, the cars, the trucks, the motorcycles, or really the applications, the websites and the interfaces for the creation and supplying of the payment information that will then travel along that super speeded highway.
Those applications, websites, and interfaces are going to be key to accessing FedNow, and that depends on who you are. For example, if you’re a bank or a credit union, how will you gain access to FedNow? Well, they have to access FedLine to be able to access FedNow. Well then what’s FedLine? Stay tuned.
So just how again, do banks and credit unions gain access to FedNow? Well, banks and credit unions will have to have access to FedLine. And what is FedLine? Well, to use the FedNow Service, you will have to have a way to access the FedLine service. Wait, wait, wait. Again. What is FedLine? Well, FedLine, in case you don’t know, is a set of electronic connection products that is in use by over 10,000 banks and credit unions around the country. It is used to access Federal Reserve payment and information services. They include products like FedLine Advantage, FedLine Command, FedLine Direct, FedLine Exchange, and many others. And in the future, we’ll include FedNow, make a quick visit over the RB services.org website, and you’ll find information on FedLine Solutions. What exactly does it say? Well, I took this straight from the website just for you.
FedLine Solutions provide organizations with direct access to Federal Reserve Bank Services, critical payment and information services and applications. FedLine solutions use state-of-the-art technology to facilitate the reliable, highly secure clearing of payments and exchange of related information for organizations and their businesses and consumer customers. Robust and flexible subscription options provide control over access and delivery of services to the back office, front, counter, and end user. More than a 100,000 users in nearly 10,000 organizations leverage FedLine solutions for delivery of payment and information services. Wow, that’s pretty impressive, right? Well, all that means is that they have the ways and the means for financial institutions to access the country’s payment channels. Well, how does that get me access to FedNow, professor, how does that work?
If I’m a – fill in the blank – a consumer, a business, a bank, a credit union, a fintech, or a service provider? Well, it can vary. See, for consumers and businesses to be able to access the FedLine network and thus be able to have access to the FedNow service, they will do so through their financial institutions, that is assuming that their bank or credit union is a participating bank with access to the FedNow service through the FedLine network for banks and credit unions to access FedLine. And then again, get a access to FedNow, they will either have direct access themselves or they will work through a correspondent bank or possibly a service provider that works through a correspondent bank. Wow. That can be kind of confusing. Yeah, it can. But see, all of this means that you will either have direct access yourself to FedLine, which will give you the ability to access FedNow, or you’ll work with someone else that does have access and you’ll send your payment instructions through them, which of course could be a service provider. What’s a service provider? Again, just to make sure we’re all clear, service providers are entities like core payment processors that provide payment services, processing, or operational and technical support to financial institutions or through a correspondent bank, a bank that offers use to their access as a service using FedLine to access Fed. Now, it does have some advantages.
The use of FedLine Network to Access FedNow service will streamline the onboarding process. Well generally streamline the onboarding process as the Federal Reserve has so many existing relationships with most of the banks in the United States because that is where most banks in the U.S. are already processing payments for other payment channels. So, there’s already relationships there. Now, again, they’re either directly or indirectly processing based on the relationship that they have with the Fed or a service provider or a correspondent bank for FedNow to be able to have even further reach to the smallest of community banks and credit unions, it will be important for the Federal Reserve to work with service providers and processors in order to ensure that these smaller institutions without direct bed line connections are also able to access the service.
And that is a goal, is to make sure that it’s evenly available for all financial institutions and everybody in the country. And the Federal Reserve. They intend to review and update their policies, their standards, and their procedures, as well as their guidelines that are related to network access, to provide direction and information to banks and credit unions of all sizes regarding how they will have network access. Now, the last thing in this class, as you may be saying, FedLine is not available all the time now, so how does that work for FedNow? Okay. The FedLine network will be enhanced and also upgraded for the support of the service to be there 24/7/365.
When it comes to FedNow processing, I gotta ask, how do you feel about having access to FedNow? Now just have a connection either directly or indirectly, the FedLine. And guess what? You’re in. Are you still looking for more though? Then it’s time to move on to the next class.
6. What Types of Faster Payments Will Be Available With FedNowSM?
Review the payment types and use cases that the FedNowSM Service solves.
What Types of Faster Payments Will Be Available With FedNow?
Hey, everybody, what do you think when people say you can send faster payments?
Do you think that’s great, but to who? What types of payments can you send? What participants can you send or receive from and will faster payments, or better yet, will instant payments via FedNow be only using certain specific and special circumstances?
I mean, really, do I want this? Will people use it?
When people ask me what are the types of payments that instant payments will actually be used for? My response is quite often, well, what type of scenarios will instant, and faster payments, not be used for?
Yeah, I answered a question with the question. Well, that’s because in instant, faster payments can be used for a wide variety of transaction scenarios. Ones that we see every day. Even today.
Now, do recall that faster payments have already been in use for years in other parts of the world. So, some of these potential scenarios are, are not yet even supported in the United States yet, but they’ve already been used in other places.
But, also, as adoption of faster payments continues to grow in the U.S., we’re going to discover more and more specific use cases and scenarios.
Let’s look at what is to be the payments landscape of the future.
I got a question. Do you like to eat?
Then you’re going to go and buy some groceries or you’re gonna go out and hopefully it won’t be alone and, and you can share a meal with a friend. And if it is one of those friends that always seems to forget their wallet, then your friend can pay you back for their portion of the meal via an instant payment. That way you don’t have to wait until you see them again next time.
And if you have a business, well, it could be that you are paying for products to be able to run your business. There actually are so many options within businesses where one or more types of faster payments – or instant payments – from FedNow may be, actually I’m gonna go with will be, a viable option that will benefit from the speed and finality and even the other features that Instant Payments offer.
But let’s, let’s now look at the specific type of payments that instant payments will be able to meet. We’re gonna start with the most common, well, what most people believe is the most common. The one that really started it all. Well, what is that?
That’s person-to-person payments, or P2P.
These are payments that are made by individuals to other individuals. It’s friends making payments to friends. It could be money that the individual sends to another individual, family members, or other individuals for a variety of purposes. Paying back your part of a meal, like we mentioned earlier. Your portion of a bill, your portion of rent, or even for taking the dogs for a walk. While person to person or consumer to consumer payments, and just FYI, person to person and consumer to consumer are the same thing. It’s one of those Coke, pop, or soda things. Well, I guess in the world of payments, it’s MICR, MICR, or Meeker.
But, in faster payments, it’s consumer to consumer or person to person. Still the same thing. So, it can be P2P or C2C. And those payments? They are what most people think of first when it comes to the types of payments, where instant payments will be an instant hit.
Well, there are other places that it’s gonna be a benefit too.
Another area? I would say, consumer to business or C2B.
Consumer to business, or C2B, well these are payments made by an individual to a business
So, if you go to a business and you need to pay them and want the payment to take place right then and there, then instant payments will work. It could be paying for dinner at the restaurant we mentioned earlier. Or paying for those groceries at the grocery store. Or paying for bow ties. Or maybe it’s paying to get your nails did.
And consumers don’t just need to be able to pay businesses and other consumers. They’re gonna also need to occasionally pay the government. Yeah, unfortunately it’s happening. That’s why you will see that faster and instant payments are also great for consumer to government or C2G.
Now, consumer to government, C2G, these are payments made by an individual to a government entity. You may have heard the saying “nothing is certain but death and taxes.” The man is always going to get his. This one ain’t always fun, but it is needed and it is necessary. And whenever we have a consumer that needs to pay the government for something, whether it be local government for, say, a speeding ticket, a license, like fishing license. Maybe something like that. Or something like a hunting license or maybe a driver’s license or maybe it’s a parking pass for a state park or even those previously mentioned taxes.
But you know what? It ain’t always consumers paying the government. Sometimes we have the government paying consumers. And you know what that means? That means this is where we’re gonna see that instant payments will also be good for, wait, wait, wait, I’m gonna say, instant payments will be great for government to consumer or what we call G2C.
These include any payments from the government to consumers. Imagine getting that tax refund even faster. Social Security benefits even faster. Or if we could have seen even a faster distribution of the stimulus payments.
And it’s not just great to get money quickly from the government. It’s also great to get money from businesses, too. That’s right, from businesses as well. And that is why faster, and those FedNow instant payments, will also be available for business to consumer or B2C. Business to consumer, or B2C, these are payments made by a business to a person. You ever had to wait on a refund, maybe an insurance claim distribution, or there is this little thing called payroll. Yes, each of those will be possible with instant payments.
Businesses won’t just have the ability to send money to consumers. They will also have the ability to, guess what, send money to other businesses. Very common payment type we have in this country, business to business or B2B payments. B2B payments are simply transactions that occur between businesses. Your business needs to pay for services or supplies from my business. Well, then instant payments can assist in making that happen.
And, if you recall, the government likes to get theirs too. And you know what that means? That means that another use case, or another type of transaction that we’re gonna be able to see, will be business to government, or B2G. Now business to government, B2G, this is gonna be payments from a business to a government entity. And I guess we’re back to paying taxes and licenses again, but for a business this time instead of a consumer.
And finally, let’s go ahead and take things full circle. One that has actually been a challenge in the industry. And that is back to our consumers. And that’s gonna be what we call A2A, or account to account, transfers. This is transfers of funds from a customer’s account to another account, also owned by that same account owner.
Now, typically, these accounts are at different financial institutions or possibly different organizations. Such as transferring money from a bank account to a brokerage account. Believe it or not, I recently experienced this one. I got a hot stock tip and by the time the money was moved to the account where I wanted to make the purchase, well, the stock price wasn’t so hot anymore. Yeah, I’m ready for these faster payments.
I’m ready for instant payments from FedNow. How do you feel about those different types of payments that can be utilized via FedNow now? There really isn’t a limit on the types and scenarios. Think those features that release will be what is needed? Think those types of payments are what will be used? Are you still looking for more? Then it’s time to move on to the next class.
7. How Does a Faster Payment Work?
Watch this video to understand how the credit push-only FedNowSM Service payment process functions.
How Does a Faster Payment Work?
Hey everybody. Are you ready to learn how faster payments work?
Well, professor, you send and you receive them. Ah! Okay, there’s a little bit more to it than that.
So, in the next couple of classes, we’re going to look at how the process flows. We’re gonna start with the basic steps. Then we’ll go more into details of how specifically the process will flow for instant payments via FedNow.
Every payment system has a flow or a process to how transactions, well, flow and process. How they move. In ACH, we have an authorization by a receiver, the initiation by the originator, then the sending of the entry by the originating financial institution, ODFI, the collection of the entries, in batches, by the ACH operator, then the distribution of the receiving financial institution, or to the RDFI, and the funds either debited or credited to the receiver. Whoa! Well, it’s not much different in checks or cards. This is actually commonly referred to as what is known as the Four Corners Model. It is a standard model for clearing and settlement processes, especially in the retail payments world.
Now, while the flow of information and funds is a little different for each payment instrument, or channel, there is a common set of participants in a similar process. We have what we call initiation, and that is when the initiator of the payments, typically a consumer, but could be a business, this is our classic payer. They could provide a check to a payee if it’s in the check world or an authorization to an originator if it’s in the ACH world.
Well, getting this money from a consumer to a merchant in any of the types we’ve mentioned in the previous class when we went over A2A, B2C, B2G, and so on and so on and so on. Well, there is a relationship between the consumer and their financial institution and the merchant with their financial institution.
The consumer and the merchant, each must have a relationship with their bank or credit union. Or you could say they are account holders that have agreements with those financial institutions. And the merchant and the consumer, the business and the person, or the business and the business, whoever it is that exchange is happening between will also have a relationship with each other. You’re gonna know who you’re sending money to and receiving money from. That’s just how it works. But it could just be transactional. Again, that’s just how it works.
Then, in between the merchant and the consumer financial institutions, will be the party that exists in the exchange of the transaction. Now, this could be the clearinghouse like we’ve seen in checks. Or the Clearinghouse like we see in RTP. An ACH operator, like we see in ACH. Or the Fed, like we see and will see, with instant payments via FedNow.
You see, the payments networks or clearinghouse organizations, they route the transactions between the financial institutions. They’re the middleman in all the payment channels. Are you starting to see the similarities in the payment channels and how these systems work?
Well, let’s break it down into how an instant payment’s gonna work at its basics. First of all, we’ll have a sender. This is someone that wants to send money to someone else. That person they are sending to, well, they’re the receiver. They’re sending to the receiver. But to get the money, the instant payment to the receiver, well the sender will have to initiate the payment.
Well, that means the sender logs onto their banking app to create the payment by filling in the payment information. Who is it going to go to? Well, the receiver. And how much do you want to send them? You enter that amount. There will have to be some type of identification information. That identifying information historically has been routing and account information. But we are starting to see the use of other information like cell phone numbers or emails. We call those aliases that can be associated with the account at the bank.
Now, once the transaction is initiated, then it takes us to the sending bank or credit union. The payment is initiated. Then this payment request is received by the sender’s bank, or credit union, and that sending bank, or credit union, confirms the account has the funds to cover the transaction, be initiated. Once confirmed, that financial institution takes the money out of the account and pushes the payment information through a faster payment channel, in our case FedNow. Once it leaves the sending bank or credit union, it can no longer make any changes to the transaction. It’s sent. It’s going as is. It’s on its way to the Fed.
The Fed, they’re the owner and operator of the FedNow Service. They work as the middleman between the banks and the credit unions to be able to quickly and securely transmit entries between sending and receiving financial institutions.
Once the Fed receives payment instructions, and conducts some validations, they will also then provide accounting and settlement services for the financial institutions involved. They can then send, or transmit, the payment instructions on to the receiving financial institution. And once the receiving financial institution receives and accepts the payment, well, then they will post the payment and make the funds available to the receiving account.
Pretty cool, right? Well, understanding how these faster instant payments work and will flow is very important to working with them successfully. So, in our journey to understanding and learning more about FedNow, it’s time to take a look more deeply into the flow of how a FedNow instant payment is gonna work. We’re gonna go into a little bit more detail.
Are you ready to learn more about a FedNow payment, now? Well, I’ll see you in the next class?
8. How Will FedNowSM Payments Flow?
Learn about the transfer of funds versus a transfer of information, and who is responsible at each step in the process.
How Will FedNow Payments Flow?
As we are learning everything we need to know about FedNow, now, one of the most important things we’ll need to understand is how will payments flow.
Understanding the process of how payments systems flow is important. And in this case, the process is designed to take place within seconds. So, we wanna know how everything is supposed to flow, especially if something goes wrong. And it also helps to know who is going to be responsible for what actions or operations at every step of the process.
Are you ready to learn more about FedNow payments, now? Then stay tuned.
How will a basic instant payment flow through the FedNow network? And I’m talking the most basic sending of a payment with the least amount of possible participants. First, let’s identify our participants. We have a sender. That will be an individual or a business that wants to send a payment to someone. We will have the sender’s financial institution, that’s the bank or credit union, that will be the entry point into getting access to the FedNow payment channel.
Then of course, there will be the Fed with the FedNow service. FedNow will then deliver the payment to the receiving financial institution, which is the bank or credit union, where the final participant, the receiver, has an account.
Sounds very similar to how many other payment types travel, doesn’t it? Yes! Yes, actually it does. And it really is that easy.
Yeah, but there is a little bit more to it. So, let’s go into some detail of the sending of the payment. Ready for this?
First thing we must have is, a sender initiates a payment by sending a payment message to its financial institution through an end user interface that’s gonna be outside of the FedNow service. Or in easier to understand terminology, we have a person, an individual, or a business that logs into an online portal or an app offered by their bank or credit union, the sending financial institution, to begin the sending of the payment, or at least payment instructions to get money to someone else.
The sender’s financial institution will be responsible for screening the payment according to whatever its internal processes and requirements are. And, after the screening process, the sender’s financial institution will actually submit a payment message within the FedNow service. This is a message. No money’s actually moved, at least not yet.
Upon receipt of the message the FedNow service, well, they’re gonna validate the payment message. Very similar with what the Fed does today for ACH and check cash letter image files. But this will be for a single payment. They will verify that the message meets format specifications. Now, assuming the payment message passes the format verification process, the FedNow service will send the contents of the payment message to the receiving financial institution to seek confirmation that the receiving financial institution intends to accept the payment message.
This is actually a very important step in the process of working with faster payments. Why? Because we need to have certainty of payment. It is a very important characteristic and feature of faster payments, or in this case, FedNow instant payments. So, at this point, the receiver’s financial institution will have the opportunity to confirm or deny that it maintains and has that account. They’re just saying, yep, that account number exists here.
And assuming that the account is at the receiving financial institution, then the receiver’s financial institution will send a positive response to the FedNow service. That’s their confirmation that they intend to accept the payment. The verification of having the account is intended to actually help to reduce the possibility of what we call misdirected payments, and it will help in lowering the number of exception cases that can occur in high volume systems.
Next, let’s actually move some money around. At this point, the FedNow service debits and credits the designated master accounts of the sender and receiver’s financial institutions. Side note, this debiting and credit could actually be done to the correspondent financial institutions that the receiving and/or sending financial institutions are working with something that we already see in other payment channels and will see with smaller community banks and credit unions.
Now, after debiting and crediting at the master account level, the FedNow service sends a payment message forward to the receiver’s financial institution with an advice of credit. And at the same time, since an acknowledgement to the sender’s financial institution, notifying them that settlement is complete, but we’re not done yet because at this point it is also expected that the receiving financial institution will credit the receiver’s account.
Remember that payment certainty, we mentioned it earlier, it is a critical component and feature of faster payment systems. While as a term of the FedNow service, the receiver’s financial institution must agree to make funds available to the receiver almost immediately.
And don’t be surprised that there will be a few exceptions, but I’ll go ahead and say that I expect any exceptions to be few and still having a timing requirement in place for what must be done. This crediting to the receiver’s account as well as the debiting of the sender’s account by the respective financial institutions, that actually happens outside of the FedNow service. Fed just deals with the financial institutions.
This happens outside of the FedNow service? Why, what? Explain that a little bit more. Yeah, see, like we see in ACH, it is the banks and credit unions that are connected to the Fed service. So, the debiting and crediting to their account holders is something they handle internally and separate from the payment channel service that they’re using.
So FedNow is for the financial institutions. The financial institutions debiting and crediting their account holders, that’s something that well, they’ll have in their agreements, and they’ll have to figure out as well.
All right. What do you think about the sending and using of FedNow payments, now? Pretty cool, isn’t it? There’s a lot of parties involved and we’ve mentioned it at a basic level, what it’s gonna be like. What now? Well, it’s time to move on to the next class.
9. What Does FedNowSM Mean to Faster Payments?
Explore what the FedNowSM Service means to the industry and how it compares to other payment channels.
What Does FedNow Mean to Faster Payments?
When it comes to faster payments, just what does FedNow mean to the industry? How does it fit in and how will it compare to other payment channels? You know, the question even comes up, how did we get here to the point where FedNow is just now offering FedNow?
Some of this may be a matter of opinion and some of it may not be known really until, well, some time has passed. And the FedNow service, well, it’ll be some time before it’s available on use too. We’ve got a lot to discuss.
It wasn’t long ago, back in 2016, I can remember giving a session called Around the World in 80 Payments. It was a session that discussed the progress of faster payment systems around the world. This was a follow-up from the year before of conducting dozens and dozens of sessions on Same Day ACH. At this time, RTP was, let’s say, still in the construction phase. You need to understand, that also at this time, the idea of faster payments in the U.S., it wasn’t really that popular.
But it was gaining traction in discussion and theory. Well, that doesn’t mean that there wasn’t anything happening in the U.S. to help advance the idea of faster payments. In fact, it was obvious that the Clearinghouse is making the RTP system.
And there was certainly a buzz, a lot of buzz about mobile apps, about digital currency, about cryptocurrency potentially revolutionizing the way we pay for goods and services. We started to hear terms like fast, faster, real time, and instant as descriptors for some of the newer payment options that were being offered.
A lot of this was happening because of what we saw from innovators in the industry and from the private sector as well. With what was happening with things like, you may have heard of, Venmo, Cash App, Bitcoin, and even within the payments industry, Same Day ACH.
Now, when comparing or looking at other payment channels, we quickly realized that even with remote deposit capture, it was difficult to describe a check as a faster payment. Now, remote deposit capture definitely made check processing faster than it’d ever been before. And it might be quick for a payer to give a check to the payee, but the payee likely didn’t have access to the funds for a day or more. A lot of that also depends on their financial institution.
Let me go ahead and say a couple of things before the check diehards pull out those old brick sized merchant scanners and begin hurling them at me. Checks are an incredible payment system and I still believe in them.
I am a firm believer that there is a place for every payment and every payment has its place. I have made that statement publicly for several years now, and I’m gonna stand behind that statement now. Checks have a place. ACH has a place. And we will get to where the place for faster payments is soon. But we’ll also have to look at other payment channels first.
And while some might describe traditional card payments as fast – they can be and they have a place too – it can be at least in the sense that the payer and the payee can execute the payment in seconds. But even these payment options cards, checks, wires, ACH, well actually I really haven’t mentioned that much about ACH, but there’s, they’re limited to business days and they’re limited to windows during the day. But these payment options don’t really fit the evolving understanding of what a faster payment is. Cards are close and not as limited though.
Well, then what is a faster payment? Well, just hold on. There is still some backstory required. This story might be better titled The Payments Professor History of Faster Payments in the U.S. and how we got to FedNow.
Let’s go back to 2013. There’s a 2013 consultation paper. The Federal Reserve proposed five desired outcomes for an improved U.S. payment system. Then there was the Faster Payments Task Force. And from 2015 through 2017, the Federal Reserve’s Faster Payments Task Force engaged a diverse array of stakeholders to be able to advance work outlined in the January 2015, Strategies for Improving the U.S. Payment System. Also, in 2017, Part One of the U.S. Path to Faster Payments was released and Part Two followed a few months later. But also in 2017, RTP from the Clearinghouse was launched.
But, we’re not done. See, as in November 2018, the Fed issued Potential Federal Reserve Actions to Support Interbank Settlement of Faster Payments. And this was a request for comment. And in 2019, August of 2019, the Fed issued Federal Reserve Actions to Support Interbank Settlement for Faster Payments, Request for Comments.
Okay, enough of the history lesson that kind of gets boring, but I gotta let you know, well, well maybe it, it is important because all of that did happen and what did come, or something that did come from the task force that is extremely relevant and important is, well, besides the five desired outcomes is that we all agreed on a definition of what a faster payment is.
Many of the faster payment systems around the world actually agree upon the following, or at least a very close definition of a faster payment. And here it is. “A faster payment is generally accepted to be a payment in which the transmission of the payment message and the availability of ‘final’ funds to the payee occur in real time or near-real time on or as near to a 24/7-day basis as possible.”
See to be classified as a faster payment, the payment option must first enable both payer and payee to see the transaction reflected in their respected account balances immediately. And second, provide funds that the payee can use right after the payer initiates the payment. And because of this, the payment is by its nature also irrevocable, meaning it can’t be reversed by the payer or the payer’s financial institution once it’s been sent. Now this is somewhat of a simple definition from the payers’ and payees’ perspective. The things actually get a little bit more complicated when you get behind the scenes.
Faster payment options can differ in several ways, including whether they are what we call a closed or an open loop. Whether they settle on an instantaneous or an immediate basis or on a deferred basis. Well, in the next class we’re gonna dive into those differences.
So, what did you think about the history lesson on FedNow? Uh, it’s really more important now, even though it took place then. All right. It’s much more important really to understand the definition of faster payments, the characteristics of a faster payment. But to get there, it took some knowing of what got us there.
Kind of ironic that it did take so long to get to faster payments, isn’t it? Well, it happens. It’s also time for something else to happen and that’s to move on to the next class.
10. What Is the Difference Between Open and Closed Systems?
Watch this video to understand the differences between a closed-loop and open-loop system, how they work, and what kind of system the FedNowSM Service network will be.
What Is the Difference Between Open and Closed Systems?
Did you know that there are different types of faster payment systems available in the U.S.? Well, actually, or even around the world? Do you know the difference between a closed versus an open payment system? Well, after this class, you will.
A closed versus an open system is very important to understand and as the name implies, a closed or a closed loop system refers to a payment system and options that are offered by a single central provider in which both the payer and the payee must maintain an account within that provider for transactions to take place. Examples would be PayPal, Venmo, Square’s Cash App. When we say they are closed systems, they’re closed to where they can only be used if you have signed up and have an account within that system.
Now, right away you might be saying, how is that any different than the banking industry? I use my bank account to put money in those systems. Oh, that’s right, you use your bank account to put money in their systems ’cause that’s how it works.
You can, and you usually do, fund or get the account started with money that comes from your bank or credit union account and then is put into the closed loop system. It’s pretty straightforward to transfer funds from payer to payee more or less simultaneously. But that is because the money never leaves that system. It’s closed in that loop and that makes it easier to make a transfer, but only within that loop. However, the payee’s ability to then use the funds received for payments with outside of that closed loop system, payments received in it, but then use the money received outside of it. Well that typically requires a transfer to an account at a financial institution, which can take some time and I have actually received money from an account within one of these systems, but then I needed to transfer the money somewhere else outside of the system.
Well, can I move it out? Yes. Can I move it out quickly? In some cases, but it might cost me more. Some of these systems are actually getting faster and faster, especially with the ability to use faster payment channels and options that are available in the open networks. But it’s still gonna take some time to get out of the closed fintech system and into the bank account or traditional system.
Then there is the open loop, which is not exactly opposite of a closed loop. See, an open loop is a system that enables payers to pay much wider groups of payees, even those who have an account with a different financial institution. In the closed loop system, the payee had to have an account in the same closed loop system or you couldn’t get money to them quickly and easily.
But in an open loop system, there’s a higher potential, I did not say guarantee, but a higher potential that you can get the money to them even though they may not have an account at the exact same location that you do or in the exact same system or on the exact same app that you’re using.
See in these systems, payments must be routed and then settled amongst the various financial institutions, typically through a shared network. Such as what happens with things like, well, Visa Direct, Mastercard Send®, the RTP network and Zelle®. That’s what they all do.
This is what we see also with checks and with ACH services, especially through the Fed. And guess what? This open loop concept, it is what we will have with the FedNow service.
Think of closed loop systems as being only available to serve accounts within the same location or a singular system or a singular loop. Whereas an open loop is more open to multiple locations in multiple users at multiple locations as long as they have some type of connection to the loop and those connection types can really vary. They’re not singular like in a closed loop.
Then, well then, this takes us to the settlement types within faster payment networks. Now you should understand the difference between closed and open loop. And now, well, we will have more for FedNow, because, now, it’s time to move on to the next class.
11. What Is the Difference Between Deferred and Real-Time Settlement?
Learn the differences between deferred and real-time settlement, and find out which one the FedNowSM Service will use.
What Is the Difference Between Deferred and Real-Time Settlement?
Did you know that there are different types of faster payment systems available in the U.S.? Well actually, or even around the world? Do you know the difference between a deferred versus a real-time settlement system? Well, after this class, you will.
Now, what is settlement? Settlement is the actual movement of the funds. Settlement is critical. It’s very important to how a payee’s financial institution, their bank or credit union receives money from the payer’s financial institution. Settlement and faster payment systems can be either on a deferred or an instantaneous or real-time basis. See, when we have a deferred settlement system, well, settlement is deferred. The name says it all.
Deferred settlement means that the transfer of final funds between the payer’s and the payee’s financial institution occurs after the payee’s financial institution has made the payment available to the payee. There can be some risk involved in that. So, if you send money to someone, they get the money you’ve sent, which is good, but the money is actually exchanged later between the banks and the credit unions. For some systems, this may be only a few minutes or a few hours, sometimes it can be a day or two.
Deferred settlement in some of our older systems actually can be a day or longer. What is the problem with deferred settlement then? Well, the problem with deferred settlement is that you’re basically giving what could be considered a short-term loan. You make that unsecured short-term loan because until actual settlement takes place, the bank or the credit union is at risk for those funds until they receive final funds and settlement from the payer’s financial institution.
Let me just say that deferred settlement, it is a great settlement process for some of our older systems, but for reducing risk in a faster payment system, it is much preferred to go within instant real-time settlement process. Well then, professor, what is an instant real-time settlement process, in an instant real-time settlement process?
That means that the transfer of final funds between the payer’s and payee’s financial institution occurs almost simultaneously within the transmission of the payment message in just seconds before the payee’s bank or credit union makes the payment available to the payee. This is actually great because it reduces the risk we saw with the deferred settlement and their short-term unsecured loan situation because in the instant real-time settlement process, the bank or the credit union, they receive final funds from the payer immediately. And the payee’s financial institution doesn’t have to incur any credit risk the way it does in a deferred settlement system.
Instant real-time settlement, it’s definitely preferred when it comes to real-time faster or in this case FedNow instant payment systems and instant real-time settlement. It is what we will see in the FedNow service in the FedNow system. Faster payment systems that rely on this type of immediate settlement arrangement like the RTP Network and again, eventually, the FedNow service are often referred to as well, instant or real time as a shorthand way of being able to distinguish them from other faster payment options that mm, well, they may meet the definition of faster, but they really entail the payee’s financial institution taking on some type of short-term credit risk. And now you should understand the difference between deferred and instant real time settlement. Like what we’re gonna see with FedNow and now.
Well, we will have more for FedNow because now it’s time to move on to the next class.
12. What Are the Benefits of FedNowSM for Consumers?
Review the use cases for consumers and how they will benefit from having access to the FedNowSM Service.
What Are the Benefits of FedNow for Consumers?
Hey, everybody. Has this ever happened to you?
Have you ever been in a situation where you have money coming in? Maybe you’re waiting on a check to arrive in the mail, maybe you’re waiting on that IRS refund check, and once the money arrives, there’s a bill that needs to be paid and paid immediately? Well, back in the day, it wasn’t uncommon for me, yes, for the payments professor, to send a check, not knowing if the money to cover the check was going to arrive in time.
It was kind of a gamble, but usually a safe gamble that the money would arrive, but it wasn’t a recommended practice. And it was one that I lost that bet occasionally and it was a costly loss as the check, well, it could be returned and then I would get a return check fee and a late fee and possibly service fees charged by the company organization that I had sent the check payment to because things didn’t clear in time. Now, it wasn’t just with checks.
There would be times that I’d be waiting on a payment to come in electronically and it wouldn’t arrive in time, and I’d be forced to make a payment using my credit card only to have to pay high interest fees. And only then if the company organization that I was paying would be willing to take a card payment. While as part of the creation of FedNow, the Federal Reserve has identified the need for instant payment capabilities in the United States. It’s a system that would allow individuals, consumers, and businesses to complete payments almost immediately or, should we say, instantly. And in true Shakira style, whenever, wherever I’m talking 24/7/365, well, 360 whatever day of the year. That’s right. Any time of the day, any day of the year, provide a receiver with access to funds in seconds. That is instant payments. It’s the ability to both send and receive funds instantly.
What benefit does this give? Well, to start with, it allows in individuals and businesses greater flexibility to control and to manage their money and to make payments they need to make, including those time-sensitive payments that I mentioned at the beginning. Can you imagine what this capability, this flexibility will do for consumers and merchants? Hmm. That timing issue, it goes away.
That crazy period between the time that the incoming funds are available for use and the time that the funds are needed for other reasons, like my bills, they go away. We’ll call these just-in-time payments ’cause that’s what they are. Everything happens just in time. Faster instant payments will also help consumers by reducing the need for borrowing, for taking on those short-term very high-interest loans and the risk associated with them, such as penalties or overdrafts or even late fees.
In fact, it wasn’t long ago that payday loans were a very hot topic. We had what was called operation choke point back in 2013. It was an initiative by the Justice Department, which investigated banks and the business they did with payday lenders and even other companies believed to be a high risk for fraud in money laundering. And banks started dropping any business that was providing those types of servers like they were hot potatoes.
Faster payments can help eliminate the need for these high-risk, sometimes, let’s say, shady practices and businesses by actually helping to protect consumers.
Let’s go ahead and call this one. It’s a better way until payday. Well, what else can FedNow instant payments do? Well, FedNow instant payments will also help with the moving of money very quickly between accounts for the individual, it could be to keep one account from having overdraft fees.
It could be to move money into, say, an investment account when you have that hot stock tip. It could be for any time where individuals, consumers face financial constraints or when there is a need to move money quickly and access funds almost immediately. Works for business too.
How about we go with, I like to move it. I like to move it, move it now.
So, account transfers are something else we’re gonna see. And account transfers for consumers, even businesses will be extremely helpful, but how can those benefits benefit as well? Well, for businesses, especially small businesses, the ability to send and receive funds in near-real time, well, that can equal to cash flow management. And the best of times it can be a struggle for the smaller and newer businesses, but in tough times it becomes increasingly important to have that cash flow.
For smaller businesses, it will also give them the added ability of efficiency over what we see in other payment channels and even the cost that can be associated with them. For example, there’s a lot of costs associated with physical checks and definitely with wires. In fact, there are many situations where faster payments could replace cash in even cards. It’s faster cash flow management if you ask me, or should we call it cash management? Now? See, worldwide consumers and businesses have been and steadily are moving toward technological advancements in payment options and practices that meet consumer and industry needs.
Some of this has come about because of the COVID-19 pandemic, but some of it was already in process. Well, then came, well, the economic downturn. And what about the need to send out all those economic impact payments? Well, everyone is looking for ways to make cashless, contactless faster secure payments.
How can faster payments help with this new world COVID has created? Well, the characteristic of faster payments make them highly attractive in this new digital economy. I know for me and for many I have spoken with, we are all looking for ways to leverage technology that’s already available within our mobile apps, sometimes on my phone or online, to be able to make use of financial and bill payment services and websites that allow us end users to make payments without any physical interaction, without having, well, to leave the house whenever possible.
And the speed, well, that can be key as these payments. Typically, they take only seconds to complete ordering and receiving food. During COVID-19, that became a big issue. How do I pay for it without touching anything and well, I want as little interaction as possible.
How many ways can businesses and consumers benefit from faster payments? I’d say we really just barely touched the beginning of the multitude of ways to come. So, what do you think about FedNow and the possibilities of what it could fill? Well now, but also in the future, guess what? There’s still more to come and I’ll see you in the next class.
13. What Are the Benefits of FedNowSM for Businesses?
Review the use cases for businesses and how they will benefit from having access to the FedNowSM Service.
What Are the Benefits of FedNow for Businesses?
Imagine if there was a payment option that had the added convenience that money can be sent without knowing the exact details, like maybe using a QR code, a phone number, or an email address. I’d really like to see it get as simple as an order or an invoice number too. And that’s not all. See, for faster payments, they’ll make the funds available to the recipient almost immediately.
As we have discussed, this is a great option for businesses managing cash flow and for consumers needing to make time-sensitive payments. All of this, well, it would assist during a pandemic, but assist in normal times too. And all of it is done as fast as possible without having to go anywhere or touch anything when possible. That’s just tough touching the possibilities of COVID, contactless, cashless payments. But there are many other use cases for individuals.
Individuals, consumers can benefit in so many ways from the flexibility and options that faster payments offer. There is that ability to complete last-minute emergency payments. Yeah, emergency payments are a big deal. The emergency payments area is all defined by what you consider to be an emergency payment though. But we know with faster payments, consumers will have the ability to avoid late fees to avoid the risk of account overdraft to help remove that anxiety and that worry and the circumstances that will beyond their control of not being able to move money fast enough that could damage their credit score. And what about the gig economy?
This is a new type of work that has appeared in the last couple of years. Things like rideshare drivers or what I actually am starting to call gig gophers. Gig gophers. Well, gig gophers are the recent surge on grocery store food go-fers, and the app-based workers that are doing your shopping, picking up your dry, cleaning, your supplies, and again, your food; they’re going for and getting it for you and bringing it to your doorstep. Before COVID, these workers were all looking for the faster way to be paid at the end of each shift. And now even more than ever, they wanna be able to get paid immediately for the work they perform that day. That’s the gig gophers. And like we have already said, having immediate access to funds means among many other things a person is less likely to have to rely on short-term and often costly financing like payday loans. But there are, there are also so many other types of payments in the current economy where many have been out of work, getting paid at the end of a shift, avoiding those payday loans, and still being able to pay rent or a mortgage by the due date and with confidence that the payment will make it by the deadline. It’s critical. It’s needed. It’s necessary.
And what if you’re well out and about safely? Of course, let’s say you want to buy something at a roadside like vegetable stand or at a flea market without swiping a card or touching a pad. And what if I’m that business owner accepting that payment? ’Cause it isn’t just consumers that will benefit. Businesses will too. Businesses can benefit from improved real-time money management and cash flow by using faster payments.
And companies are also less likely to deal with returns and adjustments due to payment reversals caused by insufficient funds. That doesn’t happen with a push credit transfer. It’s hard to have those insufficient funds with these faster payments because again, they are credit pushes, as you recall from one of our earlier classes. That is, they require the payer to have the money in their account before the payer can make the payment and those payments are final, that is, the payee’s assured of receiving the funds.
Do I need to give some more specific examples? You want ’em? Here you go. What about small businesses that accept faster payments? They can receive the funds from sales and immediately this means increasing cash on hand and potentially reducing the need for costly business loans.
And as a merchant selling a product, think how great would it be to receive an immediate, final, irrevocable payment for your product before it leaves your shop for your product, before it leaves your site for your product before, well, before you might not be able to ever get it back. And what if you are a contractor in need of supplies? Well, as that type of business, you can more quickly obtain needed materials by instantly paying suppliers that require payment in advance of shipment.
What if you’re a utility company needing to collect a payment before turning off the water or electricity? Well as that utility company, you could send those customers what we call a request for payment when they become available and receive the funds immediately once the customer has authorized that payment. Because the payment is made in response to the request for payment, that means that the payment can also be linked to the original request and account reconciliation. It can be automated.
Do you realize that this means significant savings from reduced manual processing? That this also means improved customer experience and the enabling of faster posting of the payment all while keeping the consumer’s lights and water on.
Oh, and for financial institutions?
Well, for financial institutions, the benefits are by offering faster payments, they’re gonna stay competitive by better serving their account holders, their individual and business customers. Let’s face it, account holders of every type are increasingly wanting more advanced digital banking services. And I hate to say it, but if you will not offer it to them, someone else will. Plus offering an integrated faster payment option, it gives customers a more comprehensive set of services and it might even help to attract new customers and grow more business for your institution.
Now this next one is twofold. As I hear some of my colleagues say, financial institutions may be able to shift consumers away from check and cash payment offerings, which tend to be manual, time-consuming, and can be more expensive to support.
But as I’ve said before, I believe there’s a place for every payment and that every payment has its place. Will there be a place where these older payment channels and methods are replaced? Yes, actually, there will be. Most certainly, it’s gonna happen.
It has happened over time since payments were started and it will continue to happen, but, but I also believe that some of our older payment channels, they’re gonna stay strongly in place and that faster payments will be useful in new ways, like what we are seeing in the gig economy, things that have popped up in recent years.
And they may solve for some older problems like the payday loan sharking that used to take place and also that faster payments will find other problems to solve. We haven’t realized yet, but some of those older payment systems, they’re gonna stay there doing what they do and do well. There are so many opportunities for financial institutions.
I truly believe they’re going to see and discover ways to create value for their customers through instant payments, if not through other faster payment capabilities. And all of these, all of these can drive revenue and customer retention as well as reduce cost. Let’s go ahead and call this the R, R, and R, revenue, retention, and reduction.
So what do you think about FedNow and the possibilities of what it could fill? Well, now, but also in the future. Guess what? There’s still more to come and I’ll see you in the next class.
14. Why Did the Fed Create FedNowSM?
Learn why the Federal Reserve built the FedNowSM Service network when other faster payment and real-time payment options already exist.
Why Did the Fed Create FedNow?
Have you ever wondered why do we need yet another faster payment service? Why, why, why?
I mean, we already have Mastercard Send, Visa Direct, Zelle®, and of course RTP from the Clearinghouse. So why do we need another service? Are you ready to find out why another service? This is a question that many have asked since the Fed first announced they would be moving forward with a faster payment option.
And what did the Fed say in response? Well, the Federal Reserve pointed to the comments that they received in response to their request for comment from the industry that indicated the desire for a second option for real-time payment settlement in the United States.
I want you to know they also received 2,246 form letters from individuals that argued that the Federal Reserve should not operate in competition with the private sector. And that developing and implementing the FedNow service is an inappropriate expansion of the Federal Reserve’s role that is inconsistent with its historical purpose. Ooh. But there were a lot of comments and a lot of opinions that were really expressed.
What is truly interesting is that one of the major pieces of feedback from the RFC responses was that the concern that only one payment option, one faster payment option, would create economic security issues if that singular service were ever unavailable and having two options. Well, that helps ensure at least one service is up and available.
It is actually a legitimate backup reason. If one system goes down or is unavailable, you’ll switch over to the other one, assuming you’re on both. Well, I actually really don’t buy that one. As these systems, they’re designated to be available 24/7/365. And do you need both systems? That’s a good question and we’ll get to that one later.
Some may say that FedNow may seem like direct competition or even a threat to the Clearinghouse’s RTP offerings. But let’s make sure we are all aware that the Clearinghouse is the other ACH operator. That’s right. Just like the Fed, they are also an ACH operator.
The Fed and the Clearinghouse are the two ACH operators in the U.S. So current ACH operations indicate those assumptions could be unfounded, but those are systems that run on the same format and conduct an exchange with each other. There will be differences between RTP and FedNow.
It appears that the two will be different and independent systems of each other because the Fed and the FedNow service has not indicated a timeline for interoperability with the Clearinghouse’s real-time payments or RTP network. They have not ruled it out, but they have said it will not be a priority for the initial launch.
But both the Clearinghouse and the Federal Reserve operate as ACH services in the U.S. today. And they essentially share the market providing a benefit for all U.S. players as well as both the Clearinghouse and the Federal Reserve will real-time payment services end with the same unified and interconnected result.
And that is not all that financial institutions will have to consider when it comes to real-time solutions. Integrating one system, it’s already a challenge, but the complexity of integrating multiple systems, that’s right. The implementation of both RTP and FedNow service that can actually offer another level of complexity and fun. Then there is also the third-party integration support for each service.
I do wanna say this, though. I believe this one is something that the service providers will actually solve on behalf of financial institutions, but it doesn’t mean it won’t be a problem for the institutions, and having multiple systems, multiple platforms, multiple software instances will mean added cost too. And plus, you still have to balance the accounts. Okay?
Something else to consider is the cost of each service offering. Each service will mean double the cost of participation, double the reporting, and double the fraud monitoring requirements. Just make sure we don’t have double the fraud, though. Okay.
Another concern is since the Fed’s announcement is, the question arises, will this slow down the adoption of RTP? Or even worse, will it lead to more fragmentation as account holders become the one that have to deal with the confusion over which is which, or really if anything’s even available, see faster system payment ability availability by the receiver and the receiver institution the sender is wanting to be able to send money to; it gets confusing.
So, until these systems are interoperable, there’s a high possibility of account holder confusion and frustration. Also, the Fed’s plans are known that there will undoubtedly be many financial institutions that are waiting because of that and not even offering a real-time payment or faster payment solution to their customers for years. That could be a problem for account holder retention. Now, what are the main reasons expressed by the Fed for moving forward with FedNow?
One of the first and most important is that no traditional payment system, the United States has only a single private sector provider. Having one single provider actually could create risk to the safety and to the efficiency of the country’s payments.
What if one system controlled everything and it was a system that didn’t have the reach and the capability that Fed has, want a little bit more on the Fed reach? It’s coming soon.
But know that the private sector, it is believed, would face significant challenges in establishing an accessible infrastructure for instant payments with nationwide reach. And this could result in well-limited competition that could actually have very negative effects on the pricing and even the innovation and even create a single point of failure, like we mentioned earlier, when it comes to faster payments and the infrastructure within the us.
So, the Federal Reserve Board, at least according to them, they determined that an operational role would allow the Federal Reserve to advance several important objectives. What are those? Well, it would be first creating and establishing a nationwide faster payments infrastructure, fostering stability in times of crisis, supporting resiliency through redundancy, and also simultaneously or stimulating healthy competition for clearing and settlement of instant payments. Plus, like I said, coming soon. The Fed does have really good reach.
The Fed has a history of providing payments for a long-time multiple payment options. They have had an operational role in providing payment and settlement services, uh, for decades, and this has given them extensive reach from long-established relationships that they have with, well, a little over 10,000 financial institutions, both large and small, across the entire country.
This gives the Fed the ability to be able to provide a nationwide infrastructure that should, and I believe will, help to achieve the goal of a ubiquitous instant payments by their connections alone. Now, could we see this means that potentially banks and credit unions of every size in every state, city, and community will have the ability to offer instant payment services to their account holders.
This means that individuals and businesses across the country could use the FedNow Service regardless of where they are located.
I do also have to say in full disclosure RTP is available to everybody through the Clearinghouse, but you do have to go through the Clearinghouse? Of course, for FedNow, you have to go through, through the Fed. How? Well, if you’re ready for some more on FedNow. Now, well then, it’s time to move on to the next class.
15. What Does the Banking Industry Want from FedNowSM?
Watch this video to learn about additional features financial institutions want and review industry requests and comments provided to the Fed.
What Does the Banking Industry Want from FedNow?
Have you wondered if the Fed came up with FedNow on their own or if they actually listened to the industry in creating FedNow?
If you’re not already aware, there is a process called request for comment, and it’s very common in the electronic payments industry, especially when it comes to working with the Fed. This is a process commonly used in our industry to learn what the industry thinks about proposed rule or industry changes.
In this case, the Fed put out a request for comment, an RFC, to see what the industry thought about the creation of FedNow, to see what the industry would want as far as features and functionality within FedNow. And what did the industry have to say? Stay tuned.
Before we talk about the comments, how about we mention how many comments there were and who they came from? See, according to the information from the Federal Reserve’s website, the board received 182 comments in response to the 2019 notice. Of those comment letters, three included signatures from multiple parties for a total of 353 entities responding to the 2019 notice.
Who did these comments come from? Well, overall, small and mid-sized banks were actually the largest group of respondents, providing more than 40% of the total comment letters in representing institutions from 25 different states.
I’d be remiss if I didn’t also mention that the board also received 2,246 letters from individuals. We mentioned this in a previous video. These form letters argued that the Federal Reserve should not, that’s right, should not operate in competition with the private sector and viewed the decision to develop and implement the FedNow service as an inappropriate expansion of the Federal Reserve’s role that is inconsistent with its historical purpose.
But we discussed that in the last video of why they are moving forward and why it’s still needed. We’ve got that entire class that goes over that. So, if you want to, you can go back to that class, review it as needed.
And for the record, out of the comments received, nearly all of those comments stated that the Federal Reserve should actually accelerate development and bring the FedNow service to market. But they also said that they should do it sooner than the anticipated implementation date of 2023 or 2024.
Now, in general, these commenters indicated that the FedNow service should be a made available as soon as possible. These commenters generally believe that the market needs and technology for instant payments are rapidly evolving and that an earlier implementation would better support innovation and even widespread adoption of the FedNow service.
Now, that is one thing it appears that everybody agrees on. If the Fed is going to do it, well, do it sooner than later. The industry can’t afford to wait for something that should, well, really should have been started and created years ago. See, if you do recall the history lesson, most of this started back at least as discussions in 2013. So, it’s taken or took years to decide on creating the service after one was already in place. And that is a little bit of frustration within the industry, but we have to move on.
What else did the commentator say? As in, what is it do they want in the service? And that’s what we wanna focus on in this video. Think about this. The Fed, waiting like they have, taking information from the industry like they are, is actually putting them in a position where they could create a very incredible system.
And that super incredible instant payment system, according to the commenters, would include and would offer enhanced functionality that participants could use to do what? Well, one of the first things would be mitigate fraud. We want to eliminate it, but we can’t, but we can at least lower it.
Most of us in the industry know and agree that banks and credit unions are primarily responsible when it comes to the combating, deterring and, when possible, stopping fraud related to accounts of their account holders. But the commenters, they suggested that the Federal Reserve should nevertheless provide enhanced fraud prevention tools for FedNow.
This brings up the question, will fraud be a problem for faster payments? The answer is yes, and that is something that even a single class would not be able to be enough on. So, we’ve got an entire course on faster payments fraud, but it it’s, it’s just an issue in all payment channels. Just know that.
But I love and I love, love, love seeing that the industry is requesting that the Fed consider and build this in.
Will we see enhanced functionality to mitigate fraud? I think so.
Some commenters also noted that the availability of what we call a directory would support widespread adoption of the service for at least P2P (person-to-person) payments and reduced payment routing errors. Now, this proposed directory could be provided by the reserve banks or even the private sector.
But commenters are recommending that the FedNow Service provide either a centralized link to existing directories or build its own directory. But of course, a directory containing information about account holders. That can be a risky situation because with directory services comes the heightened potential or even complexities and the priority, of course, of protecting data privacy and security.
Will we see a directory service? Uh, we already know it won’t be at the beginning, but I think we will in time.
And can we all work together? Cause what else did we see from the industry and the comments? There was the request for interoperability between the FedNow service and the existing private sector service RTP offered by declaring house.
There wasn’t highly expressed view that interoperability would promote ubiquitous access to instant payments in and help lead to widespread usage and adoption of instant payments. Ubiquitous is a word that equals success in payments. It has been the magical unicorn of payments, and that the Fed is going to make FedNow successful and create ubiquity. Then we will need to have that interoperability.
We have this interoperability between the Clearinghouse and the Fed right now with ACH. Let’s hope it will exist with faster payments, at least in the future.
Having interoperability would do many things to help the industry to create that ubiquity. Interoperability would, or at least let, let’s say, will streamline operations for banks, credit unions, fintechs, and service providers.
Interoperability will allow for a consistent end-user experience with, of course, respect to funds availability. Interoperability will promote efficiencies and savings for all the parties involved.
So, can’t we just all get along? You see, working together will be important, but there are other things the commenters are looking for too. Because of the reliance that small and mid-sized banks and credit unions have on core service providers, many of the commoners ask that the reserve banks share technical and operational requirements with the industry in advance of service implementation so that the small and mid-sized banks and credit unions are not at a disadvantage of having to wait and play catch up and make use of the system later.
Now, this disadvantage, if not corrected, it really would hamper the adoption of the service, and it could increase staffing costs and upgrades to technology required to be able to maintain the continuous operation of a faster payment service.
Anyone surprised that I have not mentioned cost and the need for education yet? Really? That’s a huge one. Well, not in this class. All right, but I do have to ask, do we need more rules? Every payment channel has its rules. There are some rules and regulations that touch on multiple payment channels, and there are some that are specific to a channel. FedNow is no different, and commenters emphasize the importance of effective governance for the FedNow Service.
They also suggested that the Reserve Banks take part in any future industry efforts that may arise to develop common rules and standards for instant payments. And it is not just a new rules and regulations situation that we gotta think about.
We will need to have and use our existing rules and regulations, so they may need to be updated and adjusted, especially when it comes to relation of things like funds availability and funds transfers through the Federal Reserve itself. The Fed has made requests for comments, and the industry has responded.
If you’re ready to move on to the next class, let’s do it.
16. Funds Availability, Bill Pay, and Fraud
Find out when and how financial institutions will be required to make funds available, how businesses can collect bills and invoices, and what the Fed’s plans are regarding fraud and the FedNowSM Service.
Funds Availability, Bill Pay, and Fraud
Hey, everybody. I want my money, and I want it now.
Well, how will funds availability work with FedNow?
One of the key components and all faster payment systems is how fast can we make funds available to the receiver for their use? So just how will funds availability work with FedNow? Stay tuned.
When discussing funds availability within the system, it is important that we note the difference between the true funds availability and the appearance of funds availability.
See, true funds availability is when settlement has taken place and the funds are final and available for use. Then there is the appearance of funds. For example, let’s say you deposit a check, your bank or Credit Union may give you full funds availability for that check deposit or partial funds availability based on the circumstances, but those funds are not final.
See that check can bounce as in the funds may not be there when the actual settlement takes place between the financial institutions and then you as the account holder will have to give the money back or repay the money that was made available to you.
Well, what will happen with FedNow payments? As we have discussed in previous classes, credit push transfers require the center to authorize and initiate each individual payment. This is their intent that they want a payment and the money to be sent.
The FedNow service will settle interbank obligations through debit and credit entries to balances in the master account at the Reserve Banks, and do recall that all transactions through the FedNow service will be final. The finality of settlement entries will mean that interbank settlement is irrevocable.
That means the money’s good; it’s gonna be there.
This also means that all participating banks and credit unions will be required to make the funds associated with each payment available to their account holders immediately after receiving notification of settlement from the FedNow Service. Very critical, very important.
As part of participating in the FedNow service financial institutions must, must, may never always key words and rules and regulations, but must agree to make the funds associated with the instant payment available to their account holders in near real time after receiving notification of settlement from the service.
Well, what if I wanna be able to pay a bill? Well, if we pay a bill, when will those funds be available and when will they be taken out of the account of the account holder?
Bill payments and other payments have historically been made by debit transfers, and now, when available, they will be handled and supported by what we will call request for payment. That’s a functionality that will switch from debiting accounts to the sender, creating and authorizing a credit transfer to pay the bill.
That sender, that account holder doing that credit push transfer their account at their bank or credit union will be debited for them to push that credit to pay the bill. But the way that they are debited by their banker credit union and by the software application and how that’s set up will all be part about well how that software application, how it’s set up, and also part of their agreement.
That’s not something that’ll actually happen in FedNow. It’s the pushing of the credit payment that will happen there. That part will take place with individual financial institutions, but the debiting and crediting of the bank and credit union accounts, that takes place at the Fed level with the master account, and that will take place instantly as part of normal processing of FedNow instant payments.
Well, unless, of course, they’re rejected during the confirmation process and once the settlement process is completed, then the FedNow Service sends a payment message to the receiver financial institution with an advice of credit, and at the same time, sends an acknowledgment to the sender’s bank notifying them settlement is complete, then at that point the receiver’s bank will credit the receiver’s account and the company or the person receiving the funds from the request for payment will have the money made available to them.
Well, there may be a determination by the financial institution as to when sender’s account is actually debited over on the sending side. The debiting of the sender’s financial institution, the crediting of the receiving financial institution and the funds availability to the receiver. All of that will take place in near real time for FedNow instant payments and, well, the bill’s paid.
What will happen if we have fraud with FedNow, what happens to the funds then? Remember, credit transfers require the sender to authorize and initiate each payment. That is good because this can actually decrease the risk of fraudulent or otherwise unauthorized payments, and it enhances the overall safety of the FedNow service.
We do not want fraudulent payments, as that is another reason where funds may be made available but then later taken away. But the funds are still made available at the time of the transaction. Always that’s important.
There may be, later on, a dispute, and there may be an error resolution process and the funds may, at a later time after conclusion of the error resolution or the dispute process, the funds may then be taken from the account holder, or the account holder may be responsible for paying them back. But that would all be after and not part of the original payment.
Every FedNow payment, unless rejected and unless the funds are not available at the Fed account level for the sending institution, well, let’s say, in normal situations, will sell instantly and funds availability will take place right afterwards.
Fraud, well it will be dealt with, but it will be dealt with afterwards or at a later time. Funds availability in FedNow means that the funds will be available now, but there will be some exceptions in certain situations.
We’ll get to that at some point, but I can about guarantee you that like other payment systems, when there are legal situations involving criminal activity, terrorists, or what we refer to also as offa-related issues and possibly some others, then the funds may not be made available immediately. But those are gonna be unique situations, not your common everyday basic transactions.
So how does funds availability work with FedNow? Now you know and it’s time to move on to the next class.
17. Now What Is FedNowSM?
Get guidance on how to discuss the FedNowSM Service with your financial institution’s staff, senior management, board members, and account holders.
What Is FedNow?
Hey. everybody. What is Fed now? How does it work?
How would you explain it to a potential business customer or maybe even your boss? This class is for those of you in the banking industry, maybe even in the software or the fintech sector, or maybe you’re in accounting and exploring new payment options. Or you could be in a banker, credit union’s operations, compliance IT department. Maybe you’re in upper management and you’re looking for a quick breakdown of what is FedNow and how does it work. Well, after everything else in this course, you’ll learn it all in this class.
Ready for that quick overview and breakdown? Well stay tuned. Maybe it’s not so quick, maybe it’s not so easy. But the FedNow Service will be available to banks and credit unions in the United States, and it will enable individuals and businesses to send instant payments any time of the day, any day of the year through their financial institution accounts.
The service will be available though only through financial institutions that are eligible to hold accounts at the Reserve Banks. Entities that are not eligible to hold accounts at the Reserve Banks will, they will be able to act as service providers or agents for participants in the FedNow Service again, the FedNow Service, it is actually designed to maintain uninterrupted 24/7/365 processing and with security features to support payment integrity and data security to be in place.
An instant payment by the FedNow Service begins when a sender – a consumer or a business – initiates a payment using a service that is provided by their bank or credit union. Now this will most likely be through a banking application, say on a computer or a tablet or a mobile device, and that’s probably gonna be offered by another entity, a third-party service provider. And after the sender’s bank or credit union receives this request from their account holder, the sender’s financial institution will then send a message to the FedNow Service to the receiver’s bank with the required information about the payment. We went over this in the transaction flow class and, remember, that upon receipt of the message, the receiver’s financial institution – that is their bank or their credit union – it will indicate whether or not they intend to accept the payment. And if they do intend to accept the payment, well then they that receiving bank or credit union will send a positive confirmation back and upon receipt, the FedNow Service will actually transfer the funds between the Federal Reserve accounts, the master accounts that are associated with those individual financial institutions, and then each financial institution will either debit or credit their customer’s account accordingly. Now that debiting before sending by the sending financial institution might take place before then the entire process. It’s intended to take place in a matter of seconds or instantly. And the receiver, well, they’re gonna have funds available for use in near-real time or instantly.
The instant payments, once completed, they will be final and irrevocable. But as we discuss it doesn’t mean there won’t be fraud and doesn’t mean there won’t be a dispute process. The FedNow Service will make use of credit push only transfers. There will be no instant debits. These instant payment credits, they will support a wide range of different types of payments as we saw for individuals, for businesses, for governments, but that’s not all. They will also support the transfer of additional supplemental information like invoice information related to a payment. That’s because of the ISO 2022 standard. It’ll allow for sending of additional information. And what does 24/7/365 really mean? It means that the service is going to have to be available and up. It’s a 24-hour business day each day of the week, including weekends and holidays. There’s no time it won’t be available. This also means that the end of day balances will be reported on a Federal Reserve accounting record for each participating financial institution on each FedNow Service business day. And to adjust for this, well, there will be access to intraday credit that will be provided to participants within the FedNow Service.
We’ll have more of that in a future course and future class because the FedNow’s instant payment service will process and settle each payment separately one by one and on a continuous 24/7/365 basis, all participants are gonna have a need for liquidity funds for available credits and their Fed Master Account at all times in order to settle each payment as it processes. Quick note, this is for when financial institutions are sending or allowing the sending of instant payments when receiving. You don’t have to have the funds available as your Fed account will receive the funds in. You only have to have funds available to send and there may be times that financial institutions may have account balances above and beyond their normal requirements that they may at least supply liquidity to those institutions in need of some help. To make this easier for participants, the Fed will be providing a liquidity management tool to support the FedNow instant payment service in this liquidity management tool. It will enable FedNow participants to transfer funds to one another to support liquidity needs in the FedNow Service. A surprising use case of this liquidity management tool is that it will also support participants in the private sector, the Clearinghouse’s RTP Instant Payment Service that is actually backed by a joint account at the New York’s Reserve Bank. The liquidity management tool will enable transfers between the Master Accounts of participants and that joint account. Pretty cool if you ask me. The Fed working in full transparency will provide access to this liquidity management tool to users regardless of whether they are full participants, using the FedNow Service to send incident payments between end users or if they use the FedNow Service only to make liquidity transfers to the Clearinghouse joint account for RTP payments.
All payment channels have formats and standards. All of them have some type of format and standard they have to follow. It helps us to achieve the nationwide reach that FedNow instant payments wants to have, and I believe will have, but it also promotes interoperability with other faster payment systems like those that are built on the same type of format, like, well, RTP payments from the Clearinghouse. But there is some differences. Just know that the FedNow Service will again use the ISO 2022 standard and that will help to remove some potential barriers to interoperability, but it won’t be there at first.
While faster payment systems have the ability to completely change the payments landscape, the first release of the FedNow Service will provide only baseline functionality to help banks manage their transition to a 24/7/365 service. The initial release of FedNow will also offer additional optional features. Well, what kind of features? Features like fraud prevention tools and the ability to be part of the FedNow Service as a receive-only participant is gonna be there as well. There will also be a request for payment capability and of course, tools to support participants in their handling of payment and queries, reconcilement, and those ever-dreaded exceptions that are gonna happen. There’s always some type of exception to be handled and there are some things we don’t know yet and that we will find out more about as that release date gets closer.
Well, the first release will have basic and some additional features available. There are already plans to add additional features and functionality to the FedNow Service in phases after the initial release. I’m a big fan of the phased approach. I’ve said that in earlier courses.
Now, what types of features and functionality are we talking about? Well, again, there’s the discussion to support what we call alias-based payments with the use of directories as well as fraud prevention, error resolution, or case management tools. And over time, well, definitely over time, other features in the future could include things like support for bulk payments or even enhanced remittance information.
Transfer FedNow, the 24/7/365 instant credit transfer service from the Federal Reserve coming in 2023. There is a lot to the service and there’s a lot to learn. But now, well, now I hope you have that foundational understanding to share with those you are working with and those you are working for. And if you’re ready to learn more about FedNow, well now is time to move on to the ending of this class and ending of this course. I’ll see you in the graduation class.
18. FedNowSM Final Review
Test your knowledge of the FedNowSM Service. Access this workbook to get started.
FedNow Final Review
Hey everybody. How about a famous professor pop quiz? Okay, let’s call this one the FedNow Know Now Final for now.
I have to say for now because some of the questions and the answers, well they’re subject to change over time, but I’d ask you think of this more of a review with all the answers being provided. That’s right. The answers will be included after the question has been asked.
The best way to go through this is to, well, first download the workbook. It’s available on the same page as this video. Then as we go through each question, stop or just pause the video after the question is asked, and we’ll write in your answer. I’ll give the answer after I’ve asked the question. Then you’ll be able to verify it, plus the answers are in the back of the book and you’ll see a clock appear on the screen. When you see that clock appear on the screen, that’s where you pause, that’s where you write in your answer. And when you’re done, press play and I’ll give you the answer and I’ll probably include a little additional explanation and elaboration.
If you happen to miss an answer because I go too fast, then make sure to stop and rewind. Are you ready for this?
We’re going to simplify the answers to keep this review kind of short, but these are the main things that I believe you should know about FedNow for now.
Now, first question. What is FedNow?
What is FedNow? Well, how about we go with the answer straight from the Fed themselves. In fact, you’ll find this answer on the FRB services.org website. The answer for this one, what is FedNow? The FedNow Service is a new instant payment service that the Federal Reserve Banks are developing to enable financial institutions of every size and in every community across the United States to provide safe and efficient instant payment services in real time around the clock every day of the year.
Next question. What will be included in the FedNow launch?
Well, what will be included in the FedNow launch, this is really important. It’s understanding what the features and functionality will be. Fed now will launch first of all with 24/7/365 access. FedNow will have the use of the ISO 20,022 standard. FedNow will have an option to be able to enroll as a receive only participant. That’s right, you don’t have to send instant payments right away. You can choose to just receive them. FedNow will also be launching with requests to pay and what to be able to combat fraud, while FedNow will allow you to have value limits. And there will be, of course, some reporting features included.
Now, you may be asking if that’s the features and functionality, I’ll launch with, well just how will I access FedNow, that’s a great question. How will you access FedNow?
How will you access FedNow? It does vary if you’re a financial institution or if you’re a business.
If you’re a financial institution, you’ll be able to access FedNow directly through FedLine, or you could gain access via correspondent bank, a banker’s bank, maybe even a corporate credit union. But it is also possible that you might work through a service provider. However, if you are a business or maybe you’re a consumer, you will gain access via your financial institution, and they can go through one of the previous mentioned gateways or options that was previously mentioned.
Well, you mentioned business and consumers. That’s very important to understand. What types of payments will be available with FedNow? That’s a great question.
What types of payments will be available with Fed Now?
Well, what types of payments will be available with FedNow? Well, FedNow will accommodate many different types of payments. One of the most common ones is gonna be person to person. Those are our P2P payments. Then there’ll be the consumer to business. C2B payments, of course, there’ll be consumer to government as well. We call those C2G. Another one that will be there will be government to consumer or G2C. Then there will be business to consumer or B2C, and of course business to business or B2B payments. And of course, we’re gonna have to have business to government. Businesses have to be able to pay the government as well. Those are B2G. And to round everything out we’ll have A2A or A2A. Wait, what? Account to account transfers, very important. If you think about it, just about every payment scenario you can think of will be possible with FedNow; you’ll also be able to do things like, I don’t know, do account transfers as well as pay bills. Those are the main things, main uses that I believe will see in FedNow, at least at the beginning. Well, those are the types of payments that’ll be included.
Just how will a payment flow, how will a FedNow payment flow?
How will a Fed Now payment flow? That’s really important. First thing we’re gonna see is the sender. And that’s either gonna be an individual consumer or a business. They’re gonna initiate a payment by sending a payment message to their financial institution. The sender’s financial institution will then submit a payment message to FedNow. See, at first it’s not in the FedNow Service, not yet, but the financial institution will then submit the payment into the FedNow Service. What happens next? Well within FedNow, FedNow will validate that payment message. What do you mean validate it? They’re gonna check and make sure that it meets all the standards and conforms with the requirements. Then FedNow will send the contents of the payment message to the receiver’s financial institution. They’re really gonna be asking for confirmation that the receiver’s financial institution intends to accept that payment message. Next, the receiver’s financial institution will send a positive response to FedNow confirming that it intends to accept the payment message. Now that is of course an ideal situation when yeah, they’re gonna accept the message after that. Well, this is where FedNow does a little bit more work because now FedNow is going to debit and credit the master accounts of both the sender and receiver’s financial institutions. It is possible if you’re going through a correspondent bank or credit union that their accounts to be debited though, just saying after that, well then FedNow sends a payment message forward to the receiver’s financial institution with an advice of credit and also sends an acknowledgment to the sender’s financial institution. And that’s to notify them that, hey, this payment’s gone through, settlement is complete, but we’re not done yet. What do you mean we’re not done yet? That’s a lot of steps. It is. The last thing that we’re gonna see is the financial institution then credits the receiver’s account. What’s really cool about all this, it takes place in seconds. In fact, it happens even faster than I just explained it.
That’s gonna have a huge impact on the industry, isn’t it? That’s, that’s a really good question. How will Fed now impact the making industry?
How will FedNow impact the banking industry or should we say the electronic banking industry? Well, FedNow will have a huge impact on the electronic banking industry. You see, FedNow will help financial institutions of every size meet the evolving, ever-changing needs of their customers while also keeping pace with the competition. That would be like our private sector where we’re seeing many offerings being available when it comes to faster payments. Oh, and you guys might’ve heard of this thing. COVID-19. Yeah, well, COVID has caused an increase in demand for faster contactless, cashless payments, and FedNow instant payments, they’ll provide just that.
Some of the benefits that we’re gonna see are gonna be, first of all, reduced interbank settlement risk. Settlement takes place right there. We call that, well, another benefit, real-time settlement. Something else we’ll see: There’s a potential opportunity to be able to grow your revenue. You might do this through transaction fees or maybe because it’s a new service or a new product offering. Uh, you want to know another one. Account holder retention. Yeah, I said retention. See, you have the opportunity to be able to retain account holders that have been using the alternative CLO loop applications.
Something else. Reduced cost through increased efficiency is possible. That’s because you’ll be able to have automation of some of these operations. That’s a lot of different features, functionality, and benefits that are gonna definitely impact the electronic banking industry now.
Now I didn’t mention close and open loop and different systems. That’s a great question. What is the difference between faster payment systems?
Well, what is the difference between faster payment systems? Faster can be used to describe many different payments. There are faster ACH payments via Same Day ACH. There are faster card payments with options like Mastercard Send or Visa Direct. There are faster payments with RTP from the Clearinghouse. And of course, there will be faster, no, no, let’s call ’em instant payments from the Fed. All of those, no, they fall under the term of faster payments. You see the term faster payments kind of broadly describes what all of these different payment options offer, what they are. They are not all systems, but some of ’em are options within a system. The FedNow service, well it will deliver and this is gonna be payments that can be sent and received within seconds at any time of the day, any day of the year, and use funds that are almost instantly available. But what do you mean about the differences? Where is that coming in? Well, these other systems, they’re gonna operate in a similar fashion, but some at different speeds and will come over different payment rails, systems. FedNow will have its own payment rail and will be the plumbing, or let’s say the pipeline, that will allow overlay services to provide all those previously mentioned features and functionality.
In mentioning all these different rails and services and systems, we have what we call open and closed loop. So, important question to understand is, is FedNow a closed or open loop system.
Is FedNow a closed or open loop system FedNow is an open loop system. Well, what’s an open loop system? Well, an open loop system enables payers to be able to pay a wider group of payees than what we’d see with a closed loop system. See in an open loop system, you can send payments to about anyone who has an account, even if it is at a different financial institution than yours. Think of an open loop system as a shared network that makes it easier for everyone to be able to participate in.
Will FedNow be deferred or real-time settlement?
Will Fed now be deferred or real-time settlement? Well, FedNow is real-time settlement. But what does that mean? It means that the transfer of final funds between the payer’s and the payee’s financial institutions occurs with the transmission of the payment message in just seconds before the payee’s financial institution makes the payment available to the payee. In other words, the funds move in real time and at that time.
And finally, this is a question everybody should be able to answer. First of all, you wanna know what is FedNow, but really what are gonna be the benefits of not just FedNow but instant payments.
So what are the benefits of FedNow Instant payments? What are the benefits of FedNow Instant payments or should we say faster payments? No, we’re gonna go with FedNow instant payments. There are benefits for consumers and there’re also gonna be benefits for businesses as well. Those benefits include certainty of payment. That’s huge. Knowing that my payment’s gone through, that it’s there, and it’s gonna arrive on time, and it’s gonna arrive on time because there’s the benefit of speed, oh, and convenience. I can do these payments at any time from anywhere. There will be improved cash flow. Think of it, as a business or as a consumer. Being able to have that money available to you sooner.
App makes it a lot easier for our next benefit. The ease of managing your finances. You will know within seconds that your payment has been sent into where it’s been sent. This is all incredible when it comes to the benefits of FedNow instant payments. You see, instant payments allow for making time-sensitive payments whenever needed and providing businesses and consumers with more flexibility to be able to manage their money.
So, what do you think about the quiz?
What do you think about FedNow? Now that’s a lot to be able to go through an answer but knowing that being able to pass this quiz definitely puts you in a place to be ready for FedNow.
Now, class dismissed.
19. FedNowSM Know Now Graduation
Complete a final review of the FedNowSM Service.
FedNow Know Now Graduation
Hey, everybody. What do you think about that now? Now, there is a lot to it, but yet not that much. And after this course you probably have more questions, I gotta admit. I do too. But you’ll hopefully got a lot of questions answered too.
So how will this play into my payment strategy, especially my faster payment strategy? You, you do have one of those, right? Will your software and your systems be able to make use of FedNow instant payments? Well, well, will they? Will your account holders use it?
We mentioned many different ways, but will they, well I’m gonna go ahead and say I’m certain that account holders will, regardless of what sector of the industry you’re working in, they’ll use it, but they may not realize it yet. And that’ll be your job to help them to realize it. And while you probably have more questions, we do have other courses available and other ones coming specifically on FedNow as well as many different areas of electronic payments. But answering the Banker’s Dozen, that is an important first step on the journey to processing of FedNow payments. And now, well now I hope you can answer what is FedNow, can you now explain it at a high level to your account holders, to your staff? And what about upper management, senior management, what will be included in FedNow are you or aware of the basic features in the functionality that will be available? How do you access FedNow? Will you be accessing FedNow directly through a correspondent bank?
Or maybe you’ll take the route of going through a service provider, potentially a fintech, all those options are available for access. What types of faster payments will be available? Will you be making use of B2B, B2C, G2C, A2A, or C2C? Oh, there’s so many letters to be mixed in with a two in the middle. Which one’s gonna work for you? How do faster payments work in general and within FedNow? And do you understand those classic payment models, the players and how they apply, especially how do they apply to FedNow? Do you understand where you and your financial institution or you and your business will fit into the model? Whew, that’s a lot to explain. A lot to go over and we’ve covered it all in this course.
How will FedNow payments flow? What the process will be and what to expect? All of it. We’ve gone over it. Especially, it’s important to know this though: The landscape’s gonna change before it comes to electronic payments.
So just what does FedNow mean to faster payments? It means a lot. And as the faster payments landscape is changing, what is the difference between the payment systems? Well, we covered that too. It’s a big deal. Do these different systems have different benefits? Maybe, but can you at least explain or are you learning what the benefits of each faster payment system are? And we’ve got an RTP course too if you need to go in more detail. RTP itself. And if we already had another faster payment system like RTP that you just mentioned, why do we even need to create FedNow again, we covered that earlier in the course too, and there’s no doubt that’s kind of a fun one to answer. And one, I hope, that without a doubt you are now better equipped to present to your teams, to your colleagues.
But now, that that is what is coming, it is something that the industry is going to see ’cause FedNow is on its way. And what does the banking industry actually want to see from FedNow? Well, faster payments, of course, and faster payments means getting my money faster. But how fast? And another question that we addressed. Very important. How will funds availability work with FedNow? Will it be any different if what we want to pay, say, a bill, how that would be handled? Yeah, it will be. And what if we have fraud or I really should say, what about when we have fraud?
So I ask you now what is FedNow? And as we have ended this course, I really hope and I know you should be able to take all of this, all this information and be in the position to respond to your teams, your account holders, even your senior management as to what it is, how it works, and why you may or may not need it. And remember, you can always go back and review the classes. You can always go back and rewatch them at your convenience.
I hope that you have enjoyed this journey to discover more about FedNow. Y’all come back now. Ha! The Fed jokes. They really never get old unless you get fed up with them. Ha, sorry I can’t help myself for now, thank you for taking the course. I definitely look forward to seeing you in future courses.
20. BONUS: FedNowSM Preparing Top 5
Review the top 5 things your financial institution needs to do to prepare for the FedNowSM Service.
ACBB BONUS FedNow Preparing Top 5
It’s time for the top five things you need to be doing now to prepare for FedNow. FedNow instant payments may be something that’s coming in the future, but that doesn’t mean you can’t start preparing now.
It’s actually a question I get quite often. What can we do to prepare for FedNow instant payments now? Well, there are actually several things we can do to start preparing for FedNow payments.
First off, we can start by taking into consideration what we’ve done in the past when implementing new systems. Secondly, we can look at what other countries that have already implemented faster payment systems and what they did to prepare. And then we can look at how institutions here in the U.S. have worked with and prepared to implement RTP. See the payments professor, I’ve done exactly that just for you. And in this class, we’re gonna go over the top five.
What’s the number one thing you can do? In my opinion, number one thing you can do is evaluate your readiness. That’s right. Number one is get ready. Let’s start by evaluating your readiness. Start by performing an overall review of your existing payments processes and resource availability. Then develop business cases for the changes you will need in order to take advantage of advances around FedNow faster, instant payments; early planning is crucial, and early planning starts with early identification to be able to cash in on FedNow.
Well, now then, know where you are now, and that’s not all you need to know because number two is FedNow and Faster Payments. Yeah, you gotta know how it’s gonna work. You gotta know what it is. You have to get educated on FedNow instant payments. Really, I’d get educated on all faster payment options in general before you do anything else. Seeking education on instant payments is critical. It’s very important. If you’re watching this video, well, then obviously you are well aware of that importance.
Know that there are many courses available from the payments professor on many different aspects of faster payments, including strategy, risk audits, planning, and even just understanding the different faster payment options. There’s a lot of different places though, that you can go to further that education. Make sure you’re doing that.
Building awareness among stakeholders and staff and educating customers on the benefits and the use cases of instant payments is gonna be critical to a successful launch. And that’s of any product I’d even say.
You should become educated on the similarities and the differences among the many faster payment options. As new innovations with instant payments become a reality in our near future, treasurers should begin to prepare in order to take advantage of promising transaction options.
Consumers and business demand for more efficient, faster, and cost-effective approaches to payments will actually put an increased pressure on treasury to rethink how they do business. So, it’s important, whether you’re a financial institution or even a business, to assess where you stand today and to start thinking about what you can do to ensure that you will be able to handle instant payments when they arrive. And it’s also gonna be up to your financial institution to determine how you will help your consumers and your businesses. All right. A lot to that answer, right?
Well, when you have evaluated your readiness and you know where you are, then have educated yourself on what is out there. It’s time to go on to number three. Number three, build a strategy. Yeah, you gotta have a strategy. You, you do have a faster payment strategy, right? That’s a strategy for whatever faster payment option or options. And I’d go with options you’re going to provide, whether it’s for RTP, Same Day ACH, instant payments, or maybe any other choice you decide on.
This one’s important, and we will talk about the different pieces that you will be doing as part of your implementing your strategy. That is implementing your strategy. As we progress through the preparing stages, you’re gonna hear more on strategy because the strategy is what helps in determining what will apply to you. Specifically, in preparing for the Fed’s instant payments. There’s a lot involved in evaluating your readiness, getting educated and creating a strategy.
Next, guess what you’re gonna have to do. Getting to know and getting involved now. That’s right. Number four, getting to know and get involved. Get involved and get the stakeholders relevant to your organization involved as part of creating that faster payment strategy. I told you it would come back up. You would have identified all these stakeholders. It’s essential for all credit unions and banks, fintechs, payment service providers, merchants, and any other participants relevant to your organization to be involved. There is also the FedNow community. Mentioned before a big fan. Go check ’em out. They’re available through the FRBservices.org website. Join the community. Get involved with the different work groups that are there that are being created regularly, getting more involved or really getting the different stakeholders more involved with your plans and your strategy. They’re critical. It’s important. You got to do it, but don’t forget, yeah, don’t forget this one.
Number five, talk to your account holders. Yeah, talk to your account holders. What do they want from faster payments? A lot of financial institutions I’ve talked to over the past few years have said their account holders don’t want faster payments. What? Yeah, they tell me this. Then I’ll ask them, how do you know? And they’ll reply, well, they haven’t asked for them. They didn’t come in and ask for them. Well, maybe they are asking for them. You just don’t hear what they’re asking for. I would always ask and still would do, are your account holders, consumers, or businesses, are they calling in? And maybe do they ask where is this payment? Or where is that deposit? Have they asked when will this bill actually show on my account? You know, another one. Have you actually looked to see what they’re saying, or at least what the data says? Have you scanned your database to see how many closed loop systems are being funded by their account from your financial institution? How many payments are actually going to PayPal, Venmo, Cash App, or many of the others out there? This is data that’s not asking. It’s screaming for faster payments, but if you’re not looking for it, then you’re not hearing their request. Every institution that I’ve talked to about scanning their entries over at least just a month-long period has come back and said, I can’t believe how many items are going out to those other systems. And it’s not just consumers. Businesses are set up on systems that have their money, their relationship, going to someone else in this age of COVID, cashless, contactless payments, they’re in high demand. FedNow instant payments are cashless and can be contactless. I’m not going to say they will replace cash, but I will say they could, depending on how prepared you are. You see, preparing is critical and this is just the start.
But make sure that you are, number one, evaluating your readiness; number two, getting to know FedNow well, and getting to know faster payments in general and how they compare to FedNow; number three, building a strategy, and that’s a strategy for FedNow instant payments or any payment option you’re gonna offer; Number four, get in the know and get involved. This includes getting all the stakeholders involved as well. And very importantly, number five, talking to and listening to your account holders. What are they asking for? What do they want? Make sure you’re providing it.
Whew. That’s a lot for just getting started on preparing for instant payments. I know it may feel like, wow, a little overwhelming, but there is more to come, see. Getting educated, getting a strategy, getting involved, getting informed. These are just the beginning of getting ready. It’s important that we take steps now to be ready to handle instant payments from the Fed. Many of these changes will alter the way your financial institution, the way that your consumers, your account holders, your businesses, the way all of them move money, the way they conduct business. So now is the ideal time to begin reviewing your processes and technologies in order to stay competitive. There is a lot when it comes to FedNow, but how well do you feel about getting prepared for FedNow?
Now, see you in the next class.
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