In today’s innovative financial services environment, businesses and consumers have many choices for making everyday payments. New study released by the Federal Reserve Research shows that of all options, there is a growing demand for faster, instant payments, and the majority of business owners and consumers are already using them.1 Additionally, more than 7 in 10 businesses and consumers say they prefer to access faster payment services, like instant payments and same-day ACH, through their primary bank.
That’s just one of the reasons the Federal Reserve’s FedNow service is off to a strong start since it launched nearly a year ago. The FedNow service enables financial institutions (banks and credit unions) to offer a variety of new instant payment services in seconds over a secure, efficient network, including paying bills, sending money to friends and family, providing access to earned wages, and transferring funds between accounts. The service launched with 35 financial institutions nearly a year ago and has grown to more than 700, with more joining every month.
“The industry has expressed enthusiasm and support for the FedNow service, with financial institutions telling us they appreciate the flexibility the service offers,” said Shonda Clay, executive vice president and head of product and relationship management for Federal Reserve Financial Services (FRFS).
Recently, FRFS FedNow Users Group Develop an ongoing, transparent cooperative relationship between the Federal Reserve and financial institutions that actively use its services.
One of the goals of this partnership is to elicit feedback about use cases for the FedNow service and how we can expand or improve it. One of the most popular is transferring funds between accounts. This can occur, for example, when a customer moves funds from a brokerage account to a bank account, or when they move funds between two different financial institutions.
Access to earned wages is another use case that is growing in popularity. It allows employers to pay gig or hourly workers the money they’ve earned at the end of a shift or day, instead of waiting for the next pay cycle. This not only gives workers more control and flexibility over their finances, but it’s also an effective retention tool for employers.
Instant payments through the FedNow service also allow insurance companies to pay claims more quickly.
“For consumers, getting benefits when they need them most is a great benefit,” Clay says, “and insurers benefit from having a competitive differentiator and satisfied policyholders.”
Despite these use cases and many more to come, some banks are keeping a close eye on the immediate payments landscape as they consider adopting them. At the same time, many smaller banks are relying on service providers to get the FedNow service up and running. Clay said the Federal Reserve is working with these third-party providers to help financial institutions adopt them more quickly.
Other financial institutions that have not yet launched the FedNow service are looking to gain a better understanding of how to avoid potential fraud. In addition to financial institutions’ practices as a first line of defense against fraud, the FedNow service continues to implement new security controls.
For example, the FedNow service recently highlighted two new risk management capabilities it will introduce this year and next: Clay said the new capabilities will complement financial institutions’ own fraud risk management techniques and add to the set of fraud mitigation tools already available through the FedNow service.
One feature allows financial institutions to set thresholds for rejecting payments that exceed a cumulative amount or frequency, allowing financial institutions to detect, for example, someone who is sending large volumes of low-value transactions to avoid detection. This feature allows financial institutions to customize services based on whether a customer is a corporate customer or a new account holder, for example.
Another upcoming feature will allow participating institutions that settle payments for other participants to set net transfer limits for those institutions, allowing control over liquidity management.
“These controls add another layer to the network-level protections that financial institutions already have in place, and we continue to build out our full suite of tools to add even more safeguards,” Clay said.
The FedNow service will continue to add new features and functionality, and Clay said the FedNow User Group will help ensure the service continues to meet the evolving needs of participating institutions. Interested financial institutions and service providers can learn more by visiting the FedNow Explorer.
1 Federal Reserve Study: U.S. businesses and consumers increasingly adopt faster, more instantaneous payment services; May 6, 2024
