FedNow, the U.S. Federal Reserve’s instant payment service went live in July of 2023. Now, 15 months later, adoption rates have been unpredictably slow, especially when it comes to banks that are able to send FedNow payments.
Before considering the challenges behind sending and receiving FedNow payments, here’s a look at some of the data behind adoption rates:
Only around 900 financial institutions have connected to the FedNow network, a fraction of the 8,000 firms the Fed stated as its goal.
Close to 60% of the financial institutions on board with FedNow can receive payments, while only 40% of firms have signed up to send payments.
Banks connected to the FedNow network range in size from under $500 million to more than $3 trillion in assets.
Of the FedNow participants, 78% are community banks and credit unions.
There are a handful of reasons why firms might be hesitant to participate in FedNow. The service faces competition with The Clearing House’s RTP platform, which was launched well before FedNow went live. Additionally, banks may be holding back because of the fees that come with participating in FedNow. Banks must pay $25 per month per routing transit number to use the service, plus a $0.045 per credit transfer fee charged to the sender and a $0.01 per RFP message, charged to the requestor. The Fed also charges a liquidity management fee of $1 per transfer.
Another reason firms may be reluctant to join FedNow is that the new payment rail comes with a set of challenges for both sending and receiving payment. Below, I’ve outlined five challenges financial institutions face for accepting FedNow payments, and five challenges they face when receiving FedNow payments, along with strategies to overcome each obstacle.
Challenges in accepting FedNow payments
1. Transaction validation in real timeFirms may have difficulty validating incoming payments instantly, especially considering the need to check for insufficient funds and fraud, plus ensure compliance, all in real time.
To combat this, firms can implement automated validation systems to check the accuracy, authenticity, and compliance of payment transactions in real time. They can also use AI tools for fraud detection to help banks validate transactions without human intervention. Additionally, they should enhance their AML compliance systems to conduct rapid checks.
2. Managing customer disputesCustomer disputes are always a headache when facilitating payments. And with instant payments, customer disputes can be even more of a challenge. That’s because instant payments reduce the time that dispute resolution can take place, since the funds are transferred immediately.
Banks should create dedicated customer service channels and clearly communicate the dispute resolution process to consumers. Additionally, banks should create robust communication procedures with other banks in the FedNow network in order to resolve reversals and other issues quickly.
3. Handling a high volume of paymentsIf the adoption of FedNow grows, banks will need to process higher volumes of payments as more customers use the new payment rail. This increase could strain legacy systems– especially if they are not optimized for 24/7 processing at high volumes– and ultimately lead to payment delays.
To overcome this, banks should scale their payment processing infrastructure by adopting cloud solutions and ensuring they have sufficient bandwidth to handle high transaction volumes, especially during peak times.
4. Ensuring compliance in real timeJust as they do with ACH payments, banks need to ensure they are complying with regulatory requirements, including KYC, AML, and other regulations. This is an additional challenge with FedNow payments, since the compliance checks and documentation need to be made in real time.
Banks can leverage automation for compliance checks and integrate real-time monitoring tools into their operations to ensure that incoming payments are compliant without delaying the transaction. As with all compliance training, firms should ensure that their compliance officers’ training is up-to-date. Fortunately, there are multiple regtech solutions, including ComplyAdvantage, Trulioo, and Fenergo, available to help.
5. Creating a seamless user experienceIn today’s digital age, consumers are not only used to receiving things instantly, they expect it. With instant payments as the standard, any delays or issues in receiving funds could create a poor user experience and tarnish the bank’s brand.
To ensure the best user experience, banks should first invest in a user-friendly interface. Transparent and timely communication is also key. Firms should offer real-time notifications and ensure that customers have easy access to their transaction history.
Challenges in sending FedNow payments
1. Ensuring adequate liquidityWith the recent increased scrutiny on adequate liquidity, it is essential that banks ensure they have enough funds on hand. With instant payments, banks must have sufficient liquidity available at all times, even during weekends and non-business hours.
To overcome this, firms can implement real-time liquidity monitoring systems and use the Federal Reserve’s liquidity management services. Banks should also establish internal controls to maintain and managing their liquidity reserves effectively.
2. Maintaining 24/7 availabilityThis may be one of the biggest headaches for banks looking to send FedNow payments. Because FedNow operates 24/7, banks need to ensure they have adequate infrastructure and staffing to support continuous operations. This can be a particular headache for smaller institutions, which lack resources to support such uptime.
To keep up with availability requirements, banks can adopt automated processing systems, use cloud-based solutions to keep their operations scalable, and partner with third-party vendors who offer 24/7 payment support. Additionally, firms should conduct regular system maintenance during non-peak hours to ensure they are not disrupting operations.
3. Ensuring fraud and security protectionJust as when receiving instant payments, accepting instant payments does not leave banks much time to identify and stop fraudulent transactions. This increases the risk for loss.
Banks can add a layer of protection by deploying real-time fraud monitoring systems to detect suspicious activities using AI and machine learning. Also, firms can implement advanced consumer authentication methods and mandate ongoing fraud prevention training for staff to further mitigate risks.
4. Managing customer payment errorsWith instant payments, there is not much time to correct mistakes. When consumers fat-finger the payment amount or send the funds to the wrong recipient, they lose the opportunity to correct errors. This could not only create customer dissatisfaction, but also lead to financial losses.
Fortunately, there are ways to mitigate such mistakes. Banks can add confirmation steps into the user interface that require users to verify payment details before the transaction is sent for processing. It is equally as important to educate customers about the finality of real-time payments and provide them with a clear process for dealing with errors.
5. Creating interoperability with other payment networksAs with other payment rails, banks need to ensure their systems are compatible across other systems. Banks should create a system that is not only compatible with FedNow, but also with other real-time payment systems, including The Clearing House’s RTP.
To ensure compatibility, banks can invest in unified payment platforms that integrate multiple payment rails. Additionally, firms may find it helpful to participate in industry-standard development efforts to help shape the conversation around compatibility and functionality.
Photo by David Clarke on Unsplash
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Conclusion: In conclusion, the adoption of FedNow has been slower than expected, with only a fraction of financial institutions connected to the network. However, there are clear challenges and strategies for both sending and receiving FedNow payments that can help facilitate a smoother transition. By addressing issues such as real-time transaction validation, managing customer disputes, ensuring compliance, and creating a seamless user experience, banks can overcome the obstacles of adopting FedNow. With the right tools, technology, and strategies in place, financial institutions can leverage instant payments to provide faster and more efficient services to their customers, ultimately benefiting the overall payment ecosystem.
