What to expect from Fed’s real-time payments service coming in 2023

By Gaia Lamperti

The Federal Reserve (Fed) revealed it will launch its new instant payment ‘FedNow’ service in mid-2023, sometime between May and July. First announced in 2020, the rollout of the service will finally bring to conclusion a multi-year journey inching the US along a journey towards a payments system fit for the needs of the post-pandemic world.

More than 120 organisations, including banks, are currently participating in a pilot programme, with technical testing set to start at the beginning of September. Some of the payment processors that are in the pilot are Form3, ModusBox Inc., ECS Fin Inc. and Alacriti Payments LLC; as well as financial organisations like BNY Mellon, FIS, Opus and VSoft.

The announcement of the launch next year comes after the decision of last June to delay the implementation of the ISO 20022 payment messaging format by two years to 2025, in response to bank concerns that this process was hampering FedNow’s rollout.

The service is designed for financial institutions of any size. When FedNow launches, they will have access to the new payment system that will provide both customers and businesses with the ability to send and receive near-instant payments more efficiently and with lower costs.

Such an instant payments system already exists in the form of the RTP Network, which is operated by the bank-owned The Clearing House, but that system has gained limited traction, partly because smaller banks are leery of larger rivals’ ownership.

“Just as the Federal Reserve has made a substantial commitment to our new instant payment infrastructure, we are calling on industry stakeholders to do the same. The shift to real-time payment infrastructure requires a focused effort, but the shift is inevitable, said Fed Vice Chair Lael Brainard in a public video announcement as she urged the private sector to get ready for the change.

“The time is now for all key stakeholders – financial institutions, core service providers, software companies, and application developers – to devote the resources necessary to support instant payments,” she added.

There will be a monthly $25 service fee per routing transit number (RTN), but, as opposed to traditional credit cards, the transaction fee that is paid by the sender per transaction is $0.045, including returns. The default limit will be $100,000, however,  institutions may raise or lower the limit while being monitored by the central bank and eventually being adjusted in accordance.

FedNow is not a blockchain-based product but it still very much relies on third parties to operate, which means that it would make money as we know it more competitive with cryptocurrencies by lowering the cost to transact and providing low-risk settlement around the clock.

“This means upgrading back-office processes, evaluating accounting procedures to accommodate a seven-business-day week, arranging liquidity providers, deploying a new customer-facing application, and promoting instant payments for key use cases to customers,” commented Brainard.

“We have been working hard to deliver on time, but ultimately the number of American businesses and households that are able to access instant payments will depend on financial services providers making the necessary investments to upgrade our payments infrastructure.”