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July 21, 2023 - Greg Oprendek

FedNow: Everything You Need to Know

The U.S. finally has its newest real-time payment rail. FedNow launched on July 20, 2023, bringing instant payment capabilities to financial institutions across the country. In fact, the Fed says this new platform will serve more than 10,000 financial institutions (FIs).

Hopefully, you’ve already been preparing for FedNow’s launch. No matter what you’re level of readiness for FedNow, this guide covers everything you need to know to get the most from it.

What is FedNow?

FedNow is a real-time payment system developed by the U.S. Federal Reserve. It will enable adopting institutions to offer their customers instant payment capabilities 24 hours a day, 7 days a week, 365 days a year. These instant payments settle in seconds and provide immediate access to funds. As the name implies, FedNow lets users send and receive money now.

How can FedNow be used?

FedNow’s goal is to meet consumer demand for instant transfers. Most financial transactions in the United States to this point, especially those involving banks, are processed and settled in batches throughout the day. With FedNow, users can send and receive payments that process immediately, even outside of regular banking hours.

This opens up many opportunities for real-time payment as an option in common transaction scenarios. Here are the main ones the Fed has already listed as prime examples.

Consumer to business

Paying things like bills and tuition payments as well as purchasing goods and services can be done instantly with FedNow. Billers can also send requests for payment through FedNow and have them completed in real-time.

Business to business

FedNow enables faster settlement of invoices, supplier payments, payroll disbursements, and other financial transactions between businesses. This can improve cash flow management and operational efficiency for businesses of all sizes.

Person to person

Similar to popular faster payment services like Zelle, FedNow can facilitate instant fund transfers between individuals. Unlike those faster payment apps which appear real-time but take some time to settle, FedNow transfers provide a convenient, instant alternative to traditional payment methods like cash or checks.

Customer to financial institution

Consumers can avoid late fees or penalties on loan payments or credit cards by sending them instantly. The immediacy of the transaction ensures the institution has a record of payment and the consumer can relax knowing their payment is done.

Business to employee

Sending instant payments to settle debts and invoices allows businesses to free up capital as soon as they receive a product or service. Instant payments can allow employees to cash out earnings when they like, allowing gig workers and other similar employees to get funds when they need them.

Me to me

Account-to-account instant transfers allow seamless movement of money and make account holders more adaptable to changing needs. Funds in mobile wallets, investment accounts, prepaid cards, and many other types of money pools can be managed instantly.

FedNow vs other real-time payment rails

The Clearing House currently operates the US’s largest real-time payment rail—RTP. Payment platforms like PayPal, Venmo, and Zelle use RTP to allow customers to make real-time transactions.

The main difference between FedNow and RTP is the increased amount of businesses and customers that will have access to real-time payments via FedNow. FedNow is the Fed’s answer to RTP—one they’re required to create as part of their duty to keep public sector options up to date with payment innovations.

RTP is only available for FIs that are members of The Clearing House. FedNow, on the other hand, will be available to all depository institutions in the United States.

Both FedNow and RTP are real-time gross settlement (RTGS) systems. This means each payment settles individually and immediately without waiting for batch processing. The services also have different transaction limits—$1 million for RTP compared with $500,000 for FedNow.

FedNow is also expected to be more affordable than RTP. The cost of a FedNow transaction is 4.5 cents, while the cost of an RTP transaction is 5 cents.

What makes FedNow so important?

FedNow is important because it’s the first real-time payment system that will reach every individual and business across the US.

A 2022 PYMNTS survey found that 4 in 5 Americans are interested in faster payment options. Instant payment services like Zelle and Venmo already dominate the market. Consumers want to send and receive money in real time, and FedNow makes that a reality for everyone.

As the use cases we detailed above show, this nationwide access to real-time payments allows individuals to get paid faster, pay for things faster, and settle debts and bills right away. Businesses get paid faster too, so they have better working capital and can reduce costs.

Finally, FedNow will also have a significant impact on financial fraud. On one hand, it can reduce traditional scams like ACH fraud that take advantage of settlement times. On the other hand, scammers have adapted and developed sophisticated social engineering scams that trick users into authorizing instant payments as part of a fraud. This leads us to another important question…

Will FedNow allow more transaction fraud?

FedNow won’t necessarily lead to an increase in transaction fraud. We know real-time payment systems have certain security advantages over traditional payment methods. But, FedNow will certainly change the types of transaction fraud we see and increase the speed at which they happen.

The Fed is putting fraud prevention measures in place to counteract fraudsters’ scams, including:

  • Transaction amount limits that are flexible based on an FI’s risk policies
  • Digital signatures, encryption and tokenization, and authentication on all transfers
  • Participant-defined negative lists to block known fraudsters
  • “Accept without posting” statuses so FIs can mark transactions for review before accepting
  • Return requests to ask participants to return transactions identified as fraud

But as the Fed themselves explain, controlling instant payment fraud means FIs are the first line of defense. They recommend FIs be aware of real-time fraud threats, activate fraud management teams, involve experts, and most importantly review and upgrade fraud prevention systems as needed.

How to make sure your organization is ready for FedNow

Stay informed

The Fed created a deeply informative and engaging guide to FedNow that walks FIs through everything from use cases and tech specs to fraud prevention and planning. This is a great place to learn about instant payments, real-time fraud, and what to expect through FedNow.

Assess fraud infrastructure

Do a comprehensive assessment of your existing payment infrastructure, systems, and processes. This includes assessing core banking systems, payment platforms, connectivity options, and settlement capabilities. Be sure to identify any gaps or areas where you lack detection and prevention methods. Review your security measures with specific regard to how they align with real-time payments.

Assess and, if necessary, enhance:

  • Authentication mechanisms
  • Fraud detection systems
  • Transaction monitoring capabilities
  • Data privacy measures
  • Overall fraud detection infrastructure

This also means looking back at your fraud infrastructure’s past performance against real-time fraud vectors and, if it falls short, considering if you need a new fraud solution altogether.

Engage customers

Tell your customers about the upcoming availability of FedNow and its benefits. Give them information about how they can leverage real-time payments. Be careful to ensure they understand the security measures you have in place and address any questions or concerns they may have. Regular updates through various channels, such as newsletters, website announcements, and customer support channels, can help keep customers informed.

Plan for Integration

Develop a detailed integration plan that outlines the steps, resources, and timeline required to connect your systems to FedNow.

This includes:

  • Assessing the necessary technology upgrades
  • Integrating third-party partnerships
  • Training employees on FedNow’s features, functionalities, and security threats
  • Coordinating internal project management
  • Collaborating with technology vendors and partners as necessary

Use the best real-time fraud prevention—AI

Machine learning has rapidly increased the speed and accuracy of fraud detection and prevention. Because fraudsters have adopted AI in new sophisticated scams, fraud fighters need it in their arsenal just as much.

But AI isn’t just the answer to real-time scams. It’s the tool that goes beyond the known fraud vectors to find the fraud on the edge and spot unseen attacks before they happen.

To learn how you can protect your customers’ real-time transfers without sacrificing a good user experience, have a chat with one of our fraud experts. They’ll help you audit your current fraud platform and ensure you’re ready to add FedNow without adding more real-time fraud with it.

about Greg Oprendek
Greg is a passionate digital marketer, avid basketball fan, aspiring fraud expert, and Content Marketing Manager at DataVisor.
about Greg Oprendek
Greg is a passionate digital marketer, avid basketball fan, aspiring fraud expert, and Content Marketing Manager at DataVisor.