Rapid innovation with FedNow Services: The growing need for instant payment services

Written by Mihail Duta Director, Global Solutions Consultant, Payments
Image of a man smiling while looking at his phone sitting at the desk in his office

The Federal Reserve FedNow instant payments service - launched in July 2023 - is designed to support financial institutions, as well as their businesses and customers, to meet the growing demand for secure, innovative real-time payment technology.

With the pressure to adopt instant payment processing services - and the introduction of FedNow services into the market - it’s crucial that financial institutions collaborate with the right partner to speed up adoption and minimize risks.

What is the FedNow Service?

FedNow services is the only digital instant payments system created (and backed) by the U.S. Government. This innovative payments solution allows eligible depository institutions to provide instant payment services for businesses and customers.

FedNow services operate alongside other services offered by the Federal Reserve (e.g. Fedwire Funds and FedACH) allowing financial institutions to transfer funds to each other on behalf of customers for use cases like vendor payments, payroll deposits, and bill payments.

FedNow services eliminate the need for funds to be held within in-app balances and transfer funds directly into a recipient account. As there is no delayed payment, no new credit risk is introduced.

Changes in the U.S. financial market with FedNow instant payments

Being able to support financial institutions of all sizes, located anywhere in the U.S., has enhanced access to instant payment solutions. In addition, FedNow instant payments offer the foundational support to meet the growing demand for account-to-account (A2A) transfer use cases.

When it comes to identifying reasons for financial institutions’ participation in FedNow services, there are several noteworthy advantages.

What do FedNow Services mean for U.S. banking?

Financial institutions can send and receive instant payments around the clock, offering greater financial flexibility when making time-sensitive payments.

The near-immediate access to funds improves the liquidity and cash flow of financial institutions. For example, businesses that rely on P2P (person-to-person) transactions and mobile payment technology benefit greatly from instant payments, as do their financial service providers who become core to the transaction flow. Their ability to request funds (e.g., for bill payments) speeds up the transaction processing and efficiency of cash flow management.

Leveraging FedNow services improves a financial institution's competitive positioning by offering better service to their customers and meeting their expectations for advanced and secure digital banking services. In a Datos Insights survey conducted in the second half of 2023, 90% of businesses indicated instant payments are important or very important to their organization. Businesses felt that it was important for their primary financial institution to offer instant payments. The survey also revealed that 42% of businesses have changed or will change financial services providers to gain access to instant payments. The increasing trend of customers who are willing to switch financial institutions (or move to fintech solutions) to obtain this capability demands financial institutions to carefully consider their payment modernization priorities or risk losing valuable market share. Furthermore, FedNow services will offer more competitive pricing compared to both wire transfers and debit card transactions.

FedNow services empower financial institutions to maintain their secure payment processes and reporting transparency, offering payment receipts and updates throughout the transaction process.

The growing desire for instant payments is not only evident in the U.S., but also in the European market which is leveraging its use cases ranging from past-due and emergency payments, cash flow management, payroll improvements, immediate returns, and an overall boost in customer satisfaction.

Interested in learning more about the trends, opportunities, and challenges financial institutions face when adopting instant payment technology? Watch our webinar with the Federal Reserve Bank - ‘The time is now to talk about FedNow instant payments’.

What are the risks of instant payments?

Although the introduction of instant payment services like FedNow services is welcomed by financial institutions in the U.S., it doesn't come without risk - especially when it comes to fraud.

It’s important to note that not all financial institutions have the technological infrastructure to support the immediate move to instant payment services. Financial institutions may still be working with legacy systems featuring older computing software, programming languages, and hardware systems that are outdated and unable to integrate new technologies and applications. Thus, these legacy systems often lack the ability to integrate modern services like FedNow services and successfully conduct advanced, real-time fraud detection. Since instant payments are 24x7, compliance and fraud management capabilities must match this availability.

Data breaches and identity theft are also risks that are heightened by the increased usage of instant payments. These are risks particularly harmful to customers. For example, customers making use of instant payment services are unable to cancel transactions once they have been made as they are cleared and settled immediately.

Adopting instant payment technology, such as FedNow services, may also increase the likelihood of data breaches and identity theft. The uptake in digital transactions and the amount of data being stored on users makes robust data security measures a greater necessity to protect against such violations. In addition to this, the sophistication of such attacks and identity profiling is growing. Real-time payment solutions like FedNow services are based on data-rich ISO 20022 messages, which hold a lot of information fraudsters can extract to help profile the targets of their activities.

The current practices already in place for financial institutions will remain relevant through the adoption of instant payments (like robust account opening procedures and the detection of unusual activity) but may need to be reviewed for weak spots. For example, anything that involves batch processing and manual intervention will be inadequate in a real-time world.

To help combat these risks, certain steps can be taken to ensure the proper adoption of instant payment technology like FedNow services. For example, it’s important to have the right partners and respective products in the fraud space, as well as a 24x7 operating environment. Explore this topic in greater depth via our webinar on ‘Fraud prevention blueprint for FedNow Instant Payments’.

Explore faster implementation of FedNow services with Finastra Payments To Go

Payments as a Service (PaaS) solutions can be the right choice for many financial institutions, especially credit unions and community banks in the U.S., seeking to expedite the integration of a robust payment offering that includes a 24x7 instant payments solution while maintaining industry best practices in fraud prevention and anti-money laundering controls. With Finastra Payments To Go, our pre-integrated solution draws from the experience and capabilities of our partner ecosystem, including robust fraud and compliance coverage, to address the risks of adopting innovative instant payments.

Our modern payment solutions technology, combined with pre-integrated specialized fintech partners' capabilities, gives financial institutions the tools and insights to both simplify and automate payment processing, with certified, direct access to both the FedNow and RTP networks. This seamless integration ensures consistent fraud analysis across transactions through real-time detection and reporting. Plus, strong encryption, secure data storage, and regular security audits ensure you can be confident in your data security.

Plus, it supports regulatory compliance with all relevant financial regulations, including data privacy laws, AML regulations, and FedNow services guidelines, so you don’t have to worry about anticipating unexpected regulatory requirements or requests.

Our system is scalable and operates 24x7. Capable of managing growing transaction volumes and offering non-stop security for your business. Explore the full scope of what’s available here.

Written by
Mihail Duta

Mihail Duta

Director, Global Solutions Consultant, Payments

Mihail Duta handles management of Finastra’s Global Solutions Consulting activities for payments in the Americas. He has been supporting the company’s payments solutions in various roles since 2000, when he joined Fundtech (which became Finastra in 2017). Mihail ran the Quality Assurance team for US...

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