How Financial Institutions Can Get the Most Out of FedNow^SM

Jump to: 4 simple Steps FIs can take to get on board FedNow

With the FedNow_SM Service launch right around the corner, financial institutions (FIs) need to be prepared to take advantage of the opportunities it offers. FedNow is a real-time payment service backed by The Federal Reserve System (The Federal Reserve), but is otherwise similar in most respects to Real-Time Payments (RTP®) network from The Clearing House. Both services enable U.S. financial institutions of any size to provide safe and efficient instant payment services to account holders.

Like RTP, FedNow will be an instant, one-direction push payment system. It’s a finalized payment—meaning that once the money is sent, the transaction is complete and final. (Parties that initiate payments can request the return of funds, but the recipient does not have to do so.)

At launch, FedNow will have a transaction limit of $500,000, compared to RTP’s current limit of $1 million. Most transactions will not come close to those limits, but they will need to be factored in for the largest payments.

The new real-time payment rail offers FIs several possible revenue-enhancing use cases. For that reason, FIs should learn the FedNow basics.

FedNow opens up additional convenience, as well as revenue opportunities

FIs that sign on with FedNow will be able to leverage new revenue opportunities created by this instant payment rail. 

1. Speed up and simplify processing of large transactions, such as real-estate payments. When consumers or businesses purchase real estate, they typically complete the transactions via wire transfer. However, this process is slow and can be complex for users. 
2. FIs can charge an expediting fee to use the instant, user-friendly and secure payment rail. Not only for retail accounts, business account holders similarly may wish to take advantage of the speed and simplicity of FedNow to complete invoice and payroll payments. Whereas a standard transfer can be made at no fee, the ability to send an instant transfer at an additional fee can create a revenue stream for financial institutions.
   
3. Consumers can transfer funds with no blackout dates. With FedNow and RTP operating as 24/7/365 networks, account holders can complete instant transfers and payments on weekends and holidays, which is an advantage over traditional wires and ACH.
4. FIs can adopt a similar fee strategy for both business and consumer account holders who get approved for a loan. Typically, when an account holder is approved for a loan, they may not get access to the funds for several days. For account holders that want quicker access to their funds, FIs can offer instant funding via FedNow, again charging an additional fee for those who want to avoid waiting for an ACH deposit.

Even though FedNow is a new service, FIs should not need to devote significant additional resources to support it, minimizing additional costs. Because FedNow and RTP don’t interact, many FIs ultimately will use both payment rails to accommodate the widest range of account holders, and they will be able to devote shared operational resources to handle both RTP and FedNow transactions. 

“A great benefit of FedNow and RTP is they are very easy for FIs to set up and maintain compared to other payment channels such as wires and ACH, which can get really complex. For instance, RTP has very simple rules. It was built that way to make it very simple to use, simple to maintain, simple to manage. The same should be true for FedNow.”  – Jeff Bucher, Senior Product Manager at Alkami

4 simple steps FIs can take to get on board with FedNow

The Federal Reserve offers a great FedNow in-depth website that outlines how the service functions, including a step-by-step guide on how to prepare, onboard and go live. Here are the key steps FIs will need to complete to start using FedNow:

• Step 1: Contact your Federal Reserve relationship manager. They can provide FIs with preparation guides and help them perform an assessment to determine the organization’s readiness.
  
• Step 2: Get internal buy-in. Implementing any new payment method will be a major undertaking. Getting buy-in from key stakeholders and determining project leads will be critical to success.
  
• Step 3: Commit and prepare. Once the FI has decided to implement FedNow, it’ll need to develop a project plan and timeline. This should include which core systems will connect to FedNow. Additionally, the FI will need to ensure it has the capability and funds to handle instant funds transfers, as well as determine how it will settle transactions. To develop this project plan, FIs should reach out to their digital banking provider who can take the lead.
• Step 4: Onboard and go live. Once a plan has been created, the FI will want to run it by their payment systems provider who will work with a Federal Reserve project manager on their behalf. It will also need to establish connectivity, access the service and perform robust testing and validation.
  

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